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Preparation
A: Application Relief
For
many potential borrowers and future home owners, preparing to
apply for a loan makes all of the difference in the
world. Not only knowing what a lender expects but
staying one step ahead of the game will insure success.
In
the previous section we discussed what a lender expects before
approving a loan. In this section, we will focus on the
three areas that often cause problems for a borrower:
income, credit, and the source of funds to close.
Income
As a standard rule of thumb, most lending guidelines
require a two year history in a profession and proof of income
at the current pay rate. If you know that in a month or
two you will receive a pay raise, wait until the new pay scale
goes into effect. Even a 25 cent raise per hour will
increase your loan amount by approximately $6,000 (assuming an
8% interest rate over 30 years).
If
you are self-employed, you may have to bite the bullet and not
write off as many expenses as you could. By doing
so, the amount of reported income increases which results in a
higher qualifying loan amount. On the other hand, you
pay more taxes and completely ignores other available loan
programs such as a stated income or no income verification
loan.
If
you currently have a temp job and you know a lender will not
accept your income, find a permanent position with an
employer. Unless you are drastically switching
professions (Marketing Executive to Chemist, for example), it
likely that you will be able to use the income to qualify.
Credit
Before searching for a home or attempting to apply for a
loan, it is highly recommended that you request a copy of your
credit report from all three major credit repositories (Experian,
Trans-Union, and Equifax). Review the information to see
if any known or unknown problems exists that could potentially
prevent you from obtaining a loan.
If
you suspect that you may have credit issues (i.e. recent late
payments, open collection accounts, judgments, etc) that
report on your credit report, take care of them
immediately. If you decide to pay off a collection
account, try negotiating with the creditor first. Often
times creditors will accept a reduced amount in order to be
paid (something is better than nothing). However, if you
pay off an account, be sure to have documented proof from the
creditor that the account is paid in full.
If
you plan on paying off several credit cards prior to borrowing
money, be sure to pay off the account(s) at least one to two
months prior to application. The reason is due to the
slow response time of many creditors in showing that an
account is paid off on your credit report. If a lender
cannot prove that you have paid off an account on your credit
report, that debt may be included in your debt to income ratio
(thus reducing the amount of the loan you qualify for).
Source
of Funds
Another sticky issue that many borrowers have to dance around
is verification of their money in order to close.
Lenders generally require that money rests in a bank account
for a minimum of three months in the bank.
If
you know you will be searching for a home soon, put the money
in the bank and let it sit there for at least three
months. If the funds will be coming from an acceptable
source such as the sale of an asset, be sure to document the
transaction by a bill of sale, a copy of the check, and a copy
of the deposit slip. Furthermore, when depositing the
money into your account, DO NOT take cash back or deposit
other items with the money into your account. You want
your bank statement to reflect the exact dollar amount from
the transaction. For example, you sell your car for
$2,000.00 and you make copies of all of the paperwork, your
deposit slip should only read $2,000.00. Nothing more
and nothing less. If you need to make an additional
deposit, do it on another deposit slip.
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