HOMEBUYERS: HOW TO INCREASE YOUR ODDS FOR MORTGAGE APPROVAL

HOMEBUYERS: HOW TO INCREASE YOUR ODDS FOR MORTGAGE APPROVAL

By Ellen James Martin Smart Moves March 28, 20101 12:00:00 AM PDT

Are you anxious to buy a home before the bargain deals vaporize, yet fearful that mortgage approval could be a problem? If so, home loan specialists say your worry may be warranted, especially if you have a blemished credit history.

"Since 2009, mortgage approval has gotten a lot trickier. Obviously, lenders have had a terrible time with lots of the loans on their books. So they're much more cautious now," says Dale Robyn Siegel, author of "The New Rules for Mortgages."

Siegel, a mortgage broker who heads her own firm, says that in recent months, "lenders have raised the bar on borrowers in multiple ways.

They're demanding higher credit scores and larger down payments. Also, many lenders now insist that borrowers prove they have enough in liquid assets to cover at least two months' worth of mortgage payments.

All this is not to say lenders don't want business from homebuyers with a steady income and strong credit.

"But if you're a weak borrower, you'll have more trouble," says Keith Gumbinger, a vice president at HSH Associates (www.hsh.com), which tracks mortgage rates throughout the country.

If you're planning to buy a home soon and want a positive outcome at the lender's office, then these pointers could prove helpful:

# Assemble a short list of lenders who come recommended.

You could always turn to the Internet

# or the Yellow Pages for lenders, but Gumbinger says you're better off compiling a short list through referrals from people you know, including your real estate agent.

Real estate agents are a good source because they rely on lenders to get their deals through and need to know who can be counted on for good service and rates.

Also, lenders referred by your agent are more likely to be responsive should problems arise because they want the agent to send them more business.

# Round up your financial documents before going to a lender's office.

Before the economic downturn, many lenders demanded few documents to approve you for a loan

Indeed, some borrowers got away with "low doc" or "no doc" loans.

But now that lending standards are more stringent, it's up to borrowers to prove they could handle their mortgage payments, Gumbinger says.

To increase your chances of approval, pull together all your key documents before going to see a lender, including W-2s and tax returns going back two to three years, and current bank and brokerage statements.

# Look into your credit before your lender does.

Siegel recommends you review your credit standing early in the approval process. That way you'll have a crack at correcting any errors on your credit reports before your lender spots them.

The three key credit bureaus are: Equifax (www.equifax.com or 800-685-1111); Experian (www.experian.com or 888-397-3742); and TransUnion (www.transunion.com or 800-888-4213).

Under federal law, you're entitled to a free copy of all three credit reports once a year. To request these, go to www.annualcreditreport.com or call 877-322-8228.

It's also wise to get a copy of your credit scores, which draw on data from the bureaus, provide a quantitative measure of a person's credit risk.

Most lenders use FICO scores, pioneered by the Fair Isaac Corp. For a fee, you can obtain your FICO scores at www.myfico.com. Siegel urges you to resist appeals from multiple lenders seeking to access your credit information

Only let a lender pull your credit if you're sure you've found the right place to apply. That's because multiple lenders' queries could cost you points on your credit score, she says.

# Be strategic in your use of credit cards.

How you handle credit cards can have a big impact on your credit score.

But Siegel says consumers are often unclear on what to do, adding that some people with multiple credit cards think they should use their spare funds to pay off one account at a time, closing it when they do.

Rather, she recommends you spread your funds across several balances, paying each card to a 50 percent or lower balance. For accounts that are paid off, Siegel stresses that it's important to keep them open: "Don't close out any card, even if it's zeroed out. Closing accounts will only hurt you."

There's no quick way to establish a positive credit history if you've never borrowed money before. But you don't need many credit lines to show you're responsible.

"The best thing is to have just a few accounts, perhaps one Visa and one MasterCard, then pay off your balances right away," Siegel says.

# Recognize the realities of current mortgage pricing.

The notorious sub-prime mortgage market that targeted homebuyers with blemished credit has nearly dried up. But lenders still distinguish among borrowers, charging less to those with high credit scores and larger down payments. This is called "risk-based pricing."

Siegel says wannabe homebuyers should do everything within reason to improve their credit picture and increase their down payment, except to postpone their purchase.