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How to prepare and qualify for a loan

Qualifying for a home loan may not be as easy today as it was five years ago, but if you’re honest about your finances and circumstances, most lenders work very hard to get you qualified. A lender considers four factors when evaluating your loan application:

• Your credit standing – have you met your credit obligations?
• Your capacity to repay the loan – do you earn enough to afford the payments?
• The value of the collateral, or property, used as security for the loan.
• Whether title to the property can be legally transferred (in the case of a sale), and whether or not there are claims against the property that might take priority over or interfere with the lender’s interest in the property.

You should focus on the first two items when preparing to qualify for a loan.

Credit and credit history

Most lenders now use automated underwriting systems that reveal in an instant whether or not you are a good credit risk. The systems retrieve information from one or all of the three major credit bureaus and calculate a score that is used to establish your credit-worthiness. Before you apply for a loan, you should check your credit report from all three bureaus. By law, you can receive one free copy of your credit report from each of the t bureaus once a year. To access your free credit report, go to www.annualcreditreport.com.

To understand how credit scores are calculated and how your score can affect your eligibility for a loan, we recommend you visit the Financial Help Center of the Fair, Isaac Web site. Fair, Isaac maintains the FICO score, which is the standard credit score used by lenders to qualify borrowers on the basis of credit.

In addition, each of the three primary bureaus – Experian, TransUnion and Equifax, offer helpful information about your credit profile and how credit scores are created. These sites also offer subscription services to view and manage your credit profile. While we do not endorse these services, we recommend links within each site that provide credit education.

If you spot what you believe to be an error in your credit report, you should challenge the error and ask that the entry be corrected or removed. By law, you have the right to dispute what you believe to be inaccurate credit reporting data. The Federal Trade Commission’s Web site offers information and resources that help you manage your credit profile.

Your capacity to repay the debt

Today, we are required to verify a borrower’s income and employment for most home loans. You will be required to provide two or more years of income tax returns, and we may contact your employer to verify your employment status and annual income.

Above all, be honest when you report your income. If a lender discovers you misrepresented your income on your application, it can affect your eligibility for the loan or the interest rate at which you would have qualified. If you are approved for a loan on the basis of a misrepresentation, you could be found to have committed mortgage fraud. A lender’s job is to match you to a loan that best fits your financial situation and goals. We can only do this if you provide accurate information.

The value of the collateral

The property you own or seek to purchase will be used as collateral, or security, for the loan. The value is determined by an appraisal which is commissioned by the lender. You might be asked to pay for an appraisal as part of the cost of obtaining your loan.

If you or your real estate agent has information you think may be useful to a lender or appraiser in valuing a property, such as a notice of a recent sale or listing prices of properties in the same neighborhood, bring it to the attention of the appraiser. While appraisers are not obligated to use this information, most want to providean accurate appraisal and welcome additional input.

Property title

Before your loan is approved, your lender must verify that title to the property is clear and that no claims against the title exist that would interfere with the legal transfer or the lender’s claim to the property in the event of a default. Depending on where the property is located, this research can be performed by a title insurance company or an attorney.

It is not unusual to uncover errors in the public record regarding title to and claims against a property. The title insurance company or attorney’s job is to identify and correct any errors before a loan is approved.

Invariably, a title insurance company will issue a policy that protects lender and homeowner against errors and omissions. The costs of these insurance policies vary, depending on the value of the property.