What practical steps can I take to improve my chances of getting a loan?
When you're thinking about buying a home, take a good look at your financial situation from the perspective of a loan officer. For a lender, not all debts are equal.
- 28/36 Ratio
In the past, lenders often said borrowers could not spend more than 28% of their gross monthly income on housing expenses, and their total debt payments could not exceed 36% of their income for a typical 10% down payment loan.
- More Flexible Guidelines
Today, many lenders are more flexible and allow a greater percentage of monthly income to go toward mortgage payments. But they are more stringent on credit card balances. Lenders often count 5% of the balance as a borrower's monthly payment, instead of the credit card's minimum payment.
- Pay Off Strategies
If you are planning to pay off some debts before you apply for a loan, consider the ones with the largest monthly payment. Many lenders, for example, prefer to have a car loan paid off, because borrowers are not likely to go out and buy a new car right away. On the other hand, if credit cards are paid off, a borrower might start charging again.
- Near Pay Off Versus Minimum Payment
If you have a few months left on a loan, lenders sometimes overlook it when calculating your monthly debt ratio. On the other hand, lenders look unfavorably on borrowers who let loans linger for a long time with minimal effort to repay the principal.
The most important factor to lenders, however, is that you pay your bills on time.