There are a lot of affordable houses on the market, and the interest rate on new home mortgages are at historical lows, but that does not mean that it will be easier to finance a property purchase.

Even consumers who would be considered credit worthy buyers in other times and circumstances have recently found it hard to obtain approval of a mortgage application. Lenders are demanding higher down payments along with higher credit scores before they approve loans to first time home buyers. Market values often mean that the house will be appraised far lower than the selling price.

While a lot of mortgage holders have successfully refinanced their loans to take advantage of the interest rates, new home applications have dwindled and only account for about 30% of all mortgage applications.

If you feel that you have job security and that now is the time to take advantage of the availability of the homes that are now for sale, do not let a single rejection of a home mortgage application keep you from your dreams of being a home owner. Shop around and look for another financial institution that may find that you are an attractive candidate for a home loan.

The criteria for approval of a loan are different from bank to bank. One of the things that may affect your mortgage application approval are the appraisers that the bank uses. Just because the first lender’s appraisal company does not think the value of the home matches the price you are willing to pay does not mean that the company used by a second bank will not see things in a different light.

The rate of interest on the mortgage may also make a big difference on the total amount of money you will have to borrow to purchase a home. The lower the rate of interest, the less money that will have to be paid over time and the better your application will look. Points and fees will also be a determining factor of the total amount of repayment, so it is important to know how they affect your mortgage.

Arm yourself with as much knowledge about mortgages as you can to give yourself the best chance at getting a home mortgage application approved. Know the difference between a fixed rate and adjustable mortgage so that you can choose the one that best fits your current financial situation as well as your long term financial goals.

Search out the banks and credit unions that offer the best terms and ask questions about fees and points. If your application is denied, find out if a larger down payment will make a difference. Make an appointment and question how the lender decided to reject your application.

Ask if the mortgage application was rejected because of you or because of the property that you wanted to buy. Unless you are absolutely in love with the home you offered on, you may find that you can be approved for a mortgage on a similar home in a different neighborhood.

It’s true that sub prime borrowers typically are people with challenged credit. However, credit is not the only criterion to be classified as subprime.
Although guidelines will vary by lender, you might be a subprime borrower if;

* You have a foreclosure on your credit report.
* You filed for bankruptcy, and it has not been two years since it’s been discharged.
* You have excessive late payments (60 days to 120 days and up).
* You’re enrolled in CCCS or an equivalent non-profit credit counseling service.
* Your income is primarily paid with cash or personal checks.
* You have very little equity in your home.
* You have a very high (above 40%) debt-to-income ratio.
* You are self-employed and have sporadic or difficult-to-verify income.
* Your home values are extremely low (under $25,000).
* Your credit score is below 620.

Notice that not every guideline is credit related. A subprime borrower can have absolutely perfect credit, but if he or she works as a housekeeper that is paid with cash, it’s quite possible that sub-prime guidelines would apply.

Even if your situation matches one of the above, there is always room for interpretation. For example, you might have discharged your Chapter 7 Bankruptcy two years ago. IF you have at least three accounts on your credit report that you’ve been paying perfectly for the two years since your discharge, you might qualify for a conventional mortgage. This is especially true if you’ve been paying your rent or mortgage on time, every time.

How can you avoid having to apply with a subprime mortgage company?
The very first step you MUST take is to obtain a copy of your credit report, along with your credit scores. Get a copy from each of the three major credit reporting bureaus: Equifax, Experian, and TransUnion. Each credit bureau maintains its own profile of your credit. They are completely independent of each other, and they do not share or swap information among themselves. You will therefore find that your three credit scores will be different.

Many mortgage companies, both subprime and conventional, will base their lending decision on the middle of your three credit scores. For example, your scores might be 588, 612, and 638. Your middle score is 612, as scored by TransUnion, for example. This is below the 620 score that many lenders use as a cutoff to qualify you for the preferred mortgage products. Now you might be wondering why you wouldn’t meet that 620 guideline since one of your scores is 638. In this case, because 638 is your highest score, it is, in effect, disregarded. Now that you know that you need to raise that 612 to at least 620, you can map out a strategy that focuses on your TransUnion credit report. Although you should try to fix all three credit reports concurrently, your TransUnion report will likely get you above 620 the fastest. It’s not as important to try to raise the 638 (although you should try anyway).

Even if 638 skyrockets to 700, your middle score will still be 612. Your individual situation will vary. Your middle credit score might be from any of the three credit reporting agencies, not just TransUnion, so keep that in mind. Be aware that credit score is not the only thing you need to worry about. People have qualified for FHA mortgages with scores as low as 580.

You must look at the entirety of your situation, including income, assets, equity, job stability, etc. Just because you’ve had a late payment, a collection, or even a bankruptcy on your record, do not automatically assume that you’re a subprime borrower. Also, don’t rely on the mortgage company to tell you whether you’re a subprime borrower. Know your own credit situation first. You might just find yourself qualifying for the very same mortgages as people with perfect credit.

We always hear about the terms “good credit” and “bad credit.” While good credit almost always means having a good payment history, the strength of your credit really lies in who is looking at your credit report.

Different companies have different criteria for evaluating good credit. An employer, for example, might consider having zero credit cards as good credit. A credit card company might consider having credit cards that are spent to the limit as good credit, as long as the payment history is perfect. A mortgage company, on the other hand, does not consider maxed credit cards as favorable.

How does mortgage credit differ from other types of credit like consumer credit?

You might hear about the conventional wisdom of good credit. For example, it’s good credit when you have paid off your consumer credit cards in full. Don’t carry a balance on your credit cards. Close credit card accounts when you don’t need them anymore.

While this is good, solid advice for debt management and control, if you’re trying to get a mortgage, it can work against you.

When mortgage companies evaluate applications, they like to see consistency. If you have a credit card, mortgage lenders want to see at least 24-36 months of perfect payment history on it; that is, 24-36 months with no breaks in between. If you’re fortunate enough to be able to pay your credit card off every month, you might want to rethink this strategy if a mortgage is in your future.

If you allow a paid-off credit card to remain that way for at least 2 straight months, your credit report will show a break in your payment history. Over the past 12 months, it might look something like this on your credit report:

Mortgage lenders want to see this on your report:

If you already have perfect credit with high scores, this isn’t much of an issue. However, if your scores are lower, or if you’re trying to rebuild credit, it is very highly recommended that you maintain a consistent payment history with no breaks. How can you do this without getting yourself into a mess of debt? You can put an inexpensive magazine subscription on your credit card, for example. That way, you never need to carry the card around, and it’s automatically charged for your subscription amount. Just make sure that you pay it off every month on time.

Conventional wisdom tells you to keep a zero, or almost zero, balance on your card. When it comes to mortgage lending, however, it is a dangerous trap. If you have a very low balance on a card, mortgage lenders will look at the “potential” of you maxing out that card. If you were to do that, your debt ratio will increase, and you could default on your loan. The higher your credit limit, the more this becomes an issue. A $300 credit card with a $20 balance won’t matter as much as a $3000 credit card with a $200 balance. In the latter scenario, you have the potential to add $2800 to your current debt load.

Generally, lenders like to see around 25% to 50% of your credit line used up. That way, it lessens the hit on your debt ratio if you were to max the card out. While this criterion by itself might not be enough to approve or deny you, it is definitely a factor worth considering.

If you have no balances on your cards, why not close the account? Then the low balance issue is moot, right? Unfortunately, closing accounts will lower your credit score. As well, lenders like to see at least 3-6 revolving accounts on your credit, and at least 1-2 installment loans. If you have too many revolving accounts with no balances, then you might want to close some. But if you’re in that 3-6 range, keep them open.

Obtain a copy of your credit report and see how your credit history reads. Make sure there aren’t any breaks in your history, especially if you’re a borderline applicant. Even if you do have a break, a high credit score will offset any penalties your potential lender might invoke. Keep the score as high as you can, and keep your credit history consistent.