Credit markets are tight. Let’s face it—the financial meltdown of 2008 scared the heck out of lending institutions. When lending giants Fannie Mae and Freddie Mac were forced to receive a hundred billion dollar bailout from the U.S. government, it became clear doling out mortgages to every applicant just wasn’t a good idea.
Thus, banks responded by tightening lending standards significantly. Today, nearly three years after the Sub-Prime meltdown, credit markets are still tight, and bank financing is still a challenge. If you are in the market for mortgage there are a few things you want to make sure you have prepared in order to secure bank financing. On the other hand, if you have been denied by a lending institution, there is still hope.
Cash Is King
Banks want to know that you are in a financially comfortable position and that you are able to handle the load of a significant debt. In other words, they want to know that you can repay the loan with interest over time! One of the ways a bank judges whether you are able to do this is by evaluating your debt to income ratio in order to ensure you will not have to take out a working capital loan to make ends meet each month. DTI varies based on the type of loan you are applying for and the lending conditions currently in place at the bank.
Prior to the recession, DTI was much higher than it is now. In order to increase the likelihood of qualifying for bank financing, a good rule of thumb is to make sure that your projected monthly mortgage payment and any other consumer debts do not add up to any more than 38% of your total monthly income.
Get A Cosigner
If you cannot qualify for a loan based on your personal financial condition, consider getting a cosigner. The cosigner may be a parent, close friend, or relative, and oftentimes the income of the cosigner can be factored into the decision, even if they are not going to be living in the home.
Try A Different Lender
If you are turned down by your bank, consider other alternatives. Oftentimes community banks or smaller lending institutions can be more likely to work with you and offer terms and conditions that larger corporate conglomerates will not. Also, if you are turned down by a bank, make sure to ask for details and explanations as to why you were turned down so that you can address those issues.
Also, keep an eye on the interest rates.