Many potential first time home buyers could not have taken advantage of the government's $8,000 tax credit because they could not qualify for a home loan. Many of these potential home owners end up in a lease-to-own agreement instead of buying the house outright. History shows that over 80% of these lease-to-own agreements do not work; simply because the tenant/buyer cannot qualify for a home loan when the time comes for them to buy.
Since the banks tightened up lending standards, almost 1 in every 3 borrower (32%) gets denied for a loan. The denial rate for African Americans and Hispanics was more than twice that for whites in 2008. The popular FHA loan accounted for more than half the loans given to African Americans and 45% of the loans given to Hispanics.
Are you a potential first time home buyer? Do you think you can you qualify for a FHA loan? If you answered yes then there is roughly a 33% chance that you will get denied the first time you apply for a home loan. Unless you get some help in advance. Here's a short guide to qualifying for a home loan the first time you apply:
1. Get a copy of your credit report and check it for errors. Over 70% of all credit reports contain some kind of error. These errors can affect your credit score negatively and may also affect your credit profile (which is more important than your actual score for most first time home buyer loans). The first thing you should do when you get your report is to check each one for general errors such as:
* Incorrect Social Security Number
* Incorrect current address (or addresses where you never lived)
* Incorrect spelling of your name
* Accounts that DO NOT belong to you, and
* Accounts that are being reported incorrectly
Finding and correcting these errors will improve your chances of getting approved for a home loan.
2. Determine your monthly disposable/surplus income. You should not be spending all the money you earn each month. Your disposable income is the money you have left over after you have paid ALL your monthly obligations. Make a list of everything you spend money on each month: rent, utilities, cell phone, auto insurance, food, everything! Add those numbers up and subtract it from your monthly income. The answer is your disposable income. If the answer is negative then you are spending more than you earn and that's a problem. At this point you may want to review the list and cut back where you can. If the answer is positive, that's good, now you have some money to save, or to use to pay down/off your debt.
3. Reduce your debt service payment to no more than 10% of your gross income. This is a very important step so pay close attention.This is the reason many first time home buyers get denied for a loan, not just credit. Your debt service payment is the money you use to pay on your debts each month. A debt and an expense are not necessarily the same thing. Debts usually show up on your credit report, expenses do not. An example of a debt service payment is your car payment. It shows up on your credit report and you are actually paying back a debt (money you borrowed). Your electricity or water bill payment is not a debt payment. It is and expense but not a debt (because you did not borrow money from the utility company).
Add up all the money you pay out each month for the debts appearing on your credit report. Divide this total by your gross income (i.e. your income before taxes etc are deducted) it should not amount to more than 10%. This is called your debt service ratio, and if it's more than 10% you have a problem. DO NOT apply for a home loan until you fix this or at least talk to a competent and caring Loan Officer.
If you have the right credit profile, are currently employed and have been working for at least 2 years, doing these 3 things will greatly increase your chances of qualifying for a mortgage the first time you apply. If you are not ready to buy a home now, do them anyway. They will help to improve your credit and your overall financial position.
