UNDERSTANDING LOAN QUALIFICATION AND IMPROVEMENT

Securing a loan, particularly for a major purchase like a home, can be a complex process. However, understanding the terms and conditions, as well as how to improve your credit standing, can significantly simplify the process. Here, we delve into the subject, exploring the differences between pre-qualification and pre-approval, the factors that influence loan qualification, how FICO scores are calculated, and tips for credit improvement.

Pre-Qualified vs Pre-Approved

Pre-qualification provides a general idea of how much you qualify for based on basic information provided to the lender. It's a preliminary step that gives Realtors and Sellers a sense that you are browsing but may not necessarily be prepared to make a purchase. As a result, pre-qualification is typically not strong enough to support a contract or offer. It's a simple process that can be done digitally or over the phone.

Pre-approval, on the other hand, is a more formal process. It involves the provision of your full financial and employment history to the lender, resulting in a specific amount for which you have been approved. Pre-approval signals to Realtors and sellers that you are serious about purchasing. In many cases, pre-approval is required before a contract is signed. Like pre-qualification, pre-approval can be done digitally or over the phone.

Qualifying for a Loan

Several factors influence your ability to qualify for a loan. They include your credit score, which indicates your willingness to repay the loan; income and employment, which show your ability to repay; assets, such as savings and down payment; and the property value, as determined by an appraisal.

Understanding FICO Scores

Your credit score plays a crucial role in loan qualification. Most loan programs require a minimum score of 620, but some may accept lower scores. Therefore, it's important to consult your loan officer. You should have at least one open and active credit line in the last 12 months, and there should be no open judgements or tax liens against you. Significant derogatory events, such as foreclosure, short sale, or bankruptcy, may also affect your ability to qualify for a loan.

Credit Improvement

Improving your credit score is key to securing a loan. Here are a few steps you can take:

• Use credit sparingly and wisely

• Review your credit report annually

• Pay your bills on time

• Keep your revolving credit balance-to-limit ratio below 30% (10-20% is optimal)

• Maintain a good mix of credit, including both revolving (credit cards, personal lines of credit) and installment credit (auto loans, student loans, mortgages)

• Avoid closing unused accounts

• Minimize inquiries by applying for credit only when necessary

• Shop for a loan within a 2-3 week period to avoid multiple hard inquiries

By following these steps, you can improve your credit score, increase your chances of loan approval, and possibly secure better loan terms.

Income and Employment

Stability in income and employment is another factor lenders consider. You are typically required to have been employed for at least two years, preferably in the same line of work. Schooling may count as job history. Commission, overtime, and bonus income must have a two-year history of receipt. Job gaps may be acceptable on a case-by-case basis. Self-employment requires two years of filed tax returns and a business license or permit for two years.

Assets

Assets play a significant role in loan qualification. You must be able to verify funds for down payment, closing costs, and required reserves (depending on the program). Acceptable sources of funds include checking, savings, stocks, mutual funds, 401k loans, and gifts from family members (when allowed by the program selected). It's crucial to show the entire paper trail for these funds.

Property

The property you wish to purchase also impacts loan qualification. The appraisal must be equal to or greater than the purchase price, and the property must be in good condition unless it's being purchased for renovation. Certain loans have specific property requirements. For instance, VA loans require the property to be safe, sound, sanitary, have adequate heating, a safe water supply and sewer, adequate roofing, and dry, clear, and properly vented basements and crawl spaces. The property should also have safe access from the street.

Understanding Mortgage Rates

Personal factors such as your credit score, down payment, and occupancy can affect mortgage rates. A high credit score indicates less risk to lenders, making you more attractive for loan approval. Down payment amount showcases your investment in the home, with a larger down payment indicating less risk to the lender. Lastly, whether the home is your primary residence, a second home, or an investment property can impact mortgage rates. Generally, rates are lower for primary residences as you are less likely to default on your mortgage.

In conclusion, understanding the process of loan qualification, the factors involved, and ways to improve your credit standing can significantly simplify the loan acquisition process. It is always recommended to consult with a loan officer or a financial advisor for personalized guidance based on your unique circumstances.