photo by franz berni
Does anyone remember back in January when all the experts were saying the worst was over and that the economy had just hit a few rough patches? Today, we can all just smile at the “experts” on TV and wonder how they can get paid for such trash. The credit market is a very good barometer to gauge our economy. Obviously, right now banks are scared to lend which is a far cry from three years ago. So today, I would like to get into what you can do to improve your chances of obtaining a loan and what banks may be looking for.
How do banks judge a application:
- Traditionally, banks focused more upon collateral than any other factor in making loans; however, bankers now claim that competition has forced them to focus more on an applicants ability to repay the debt as it comes due, rather than the collateral securing the loan.
- If you were a business this would be in the form of financial statements (Balance Sheet, Profit & Loss etc….). However, as an individual you will need to provide verifiable proof of income and a list of your major expenses.
- Many lenders rely heavily on debt to income ratio. This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts. There are two calculations: there is a “front” ratio and a “back” ratio and they are generally written in the following format: 33/38.
Example: If you make $5,000 a month, with 33/38 qualifying ratio guidelines, your maximum monthly housing cost should be around $1,650. Including your consumer debt, your monthly housing and credit expenditures should be around $1,900 as a maximum.
How to Improve Your Chances:
- Obviously, the more you can put down the better.
- Pay down some credit cards. This will improve your all important Debt-to-Income Ratio.
- Befriend a Mortgage Broker. They deal with the lending market everyday. I believe the crooks in the industry are gone but then again I may be wrong.
In general you’ll need a 660 credit score and a 10% down payment to qualify for a loan. Another important criterion is how much of your monthly income goes to repaying all your debts. Today lenders want you to cap that at 41% of your income. (Source CNNMoney.com)
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Great article! I will link to this one from my blog. I hope you don’t mind. :)
It is not just in the States. In Malaysia, the rate of actual lending by banks have also fallen somewhat despite the central bank’s directive to banks to reduce their lending rates. I think banks are becoming stricter in vetting the potential borrowers.
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