Getting Your Finance In Shape

Get Your Finance in Shape Before Applying for a Loan

Who wouldn’t want to get the best loan? However, as many as 25 percent to 50 percent of all loan applicants do not precisely fit the guidelines that lenders follow. Here are the common problems that they face.

• Monthly income and expenses: insufficient income or high debts
• Credit history: late payments or delinquencies
• Insufficient cash for down payment and closing costs
• Unstable employment history
  

You might be among those many people who have problems qualifying for a loan. To be qualified for a better loan, you need to start financial workout as early as possible. It's going to take a lot of patience, restraint and some careful planning, but it will help you get where you want to go. Here are some suggestions that prospect loan applicants will want to consider

Related article: How Your Loan Applications Are Evaluated

1. Check your credit report, correct mistakes early

If you plan to apply for a loan, start by ordering a copy of your credit report from the three major credit bureaus and review the information. Credit report is the first thing a potential lender will be looking at and you will want to make sure it looks good.

Studies have shown that many credit files contain inaccuracies that could affect your credit rating, and even lead to the rejection of a loan application. If there are errors or things that need to be addressed, you should address them early enough. By reviewing your credit report early on, you will have time to dispute any items that may be the result of simple human error or a technical glitch.

Moreover, reading your credit report and understanding how your credit data might be interpreted may give you a chance to improve your credit worthiness from the lender’s point of view. Incorporating a review of your credit report into your financial planning is one of the best ways to make sure you shop for a loan with the most favorable terms possible.

More Info: How to check your credit report

2. Make payments on time

Make loan and other debt payments on time, especially over the months leading up to the filing of your mortgage application. It is the most important yet simple factor that can affect the result of your loan application. Every 30-, 60- or 90-day delinquency on a loan or credit card is going to reduce the credit score and may end up with getting you a loan with a higher interest rate and with less favorable terms -- if you get one at all.

Although late payments should always be avoided, some late payments are worse than others. Never miss a mortgage or rent payments! You also need to be sensitive to installment payments such as auto loans, student loans, bank loans, or any government obligations. If you have to miss something, let the credit card or other revolving debts be the first to go.

3. Reduce and consolidate your debts

If you have considerable amount of debts, you will have a pretty rough road ahead in getting a loan you desire. Plan ahead and pay off your debts. Before shopping for a main purchase, make a sustained effort to reduce your overall debt burden.

You can also lower your monthly debt payments by restructuring your debt in order to have your debt to income ratios stay within lender’s guidelines. Debt consolidation is a process that allows you to combine all of your monthly bills into one, conveniently-low, monthly payment. It is wise to consolidate your debts ahead of the time so that you can establish a payment history for the new debt and your old debts show as paid on your credit report.

More Info: Debt Consolidation

4. Avoid any other financial commitment

You would certainly not want to purchase a luxurious sports car a month before applying for a mortgage loan. Do not make any big purchases if you are planning to buy a home. Besides the obvious fact that it makes less money available for the down payment, it might require you to get yet another loan. If multiple financial obligations are going to pop up in the near future, get the mortgage first.

Avoid credit inquiries, such as new applications for credit cards, especially in the months prior to the loan review process. Many inquiries make it appear that you are shopping for credit, which indicates that you anticipate the need for many lines of credit. However, you don’t have to worry about shopping for the best loan. When those inquiries are made within 30 days of each other, they are counted as only one inquiry.

If you have many unused credit accounts or excessive lines of credit on your credit accounts, consider closing those accounts. Lenders view the unused credit lines as your “potential debts”, because you could max out all those credit lines after they give you the loan and therefore become unable to repay all of your debt. The less available credit you have, the less risk you will pose to a potential creditor or lender.

5. Save, obtain cash for down payment early enough

Another obvious thing to do is saving money for a down payment. It is important to take a portion of each month's income and set it aside. Increase the size of the down payment you're able to make by saving as much as possible, as often as possible. Put the savings into money market or other accounts that are safe, easy to cash out, and with reasonable rates of return.