How to Get a Home Loan During the Housing Slump

By: Keith Lutz

The housing bubble has burst and the sub prime lending trend has led to financial crisis for many home owners. Unethical practices by some lending institutions have led to buyers biting off much more than they could chew. With so many home owners defaulting on their loans, lenders have become reluctant to hand out money. As such, they now have much more stringent application requirements. Proof of income, better credit scores, and higher down payments are some of the new policies in place. This can make it hard for some borrowers to even get their feet in the door.

The first thing that you need to do to increase your desirability as a loan candidate is to check your credit score. Your credit score is essentially a tool for showing the lending companies what kind of financial risk you pose. The higher your score, the more likely it is that you will pay back your loan. If you have a lower score, it tells lenders that you may not be able to return their money. The more risk you present to lenders, the harder it will be for you to get the mortgage you need. Besides making it much easier to acquire a home loan in the first place, a higher score also increases your eligibility for lower interest rates and more favorable loan terms. It is definitely to your advantage to know where you stand from the point of view of the mortgage brokers.

After checking on your score, there are simple things that you can do to improve upon or maintain your current score. Remember, even if you have a less than desirable credit report, there are always opportunities to bring up your score.

The first step in improving your credit score is checking to see if there are any inaccuracies on your credit report. This is surprisingly common and can seriously affect your rating. Many errors are easy to fix, and should be done quickly. You don't want to wait until you apply for a mortgage to find out that you're being penalized for something by mistake.

The next step is to keep on top of all your payments. Late payments cost you valuable credit points, so be diligent in paying things off on time. Also pay the full amount owed on the payment. Again, partial payments can hurt your financial reputation.

Keep your debts as low as possible, i.e. don't max out all your credit cards. You want to have a low debt to credit ratio in order to show the credit bureaus that you can responsibly manage your spending.

You also don't want to go crazy by accepting every credit card offer that arrives in the mail. Credit bureaus use your history in calculating your score, which means that the older your card account, the better. It shows that you are a solid bet in terms of lending.

Aside from improving your credit score, you can also increase your chances of getting a good mortgage by asking for less money. Due to the sub prime crisis, banks are leery of lending out large mortgages. When they do, they require documentation that proves employment status and income amount. They also charge higher interest rates and require higher down payments. By setting your sights a little lower during this time of restrained lending, you place yourself in a good position to getting what you want.

Go for a fixed-rate mortgage. Many experts are predicting that interest rates will continue to climb, so you will want to lock in now while you can. In fact, while variable rate mortgages are at the mercy of the rising interest rates, fixed rate mortgages are seeing a drop in their rates. These mortgages are also easier to get, as lenders are becoming tougher in their approval process.

While the real estate market is indeed in a downturn, purchasing a home will always be a wise investment in the long run. Entering the market now is more difficult than it was a year ago, when sub prime loans were given to anyone who asked. Many of these loans were given with no regard for whether or not the buyer could afford to pay them back, and we are seeing the unfortunate results of this debacle.

You have the benefit of learning from others' mistakes. If you take some time now to improve your credit score, research your options, examine your resources, and go for a traditional fixed rate mortgage, you can make a sound investment without the worry of being turned down for a home loan, or being plagued by undesirable mortgage terms. You are in control of your home real estate future, so act now.

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