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Getting Approved for Rural Home Financing

Chris Gartner
Educational Opportunities: 
Home > Education & Events > November 2018 > Getting Approved for Rural Home Financing

Being in the consumer finance industry for almost 15 years, has provided me with a great perspective into the credit decision process.  Whether you make a lot of money or not so much, are just starting your working years or in retirement, work for others or are self-employed, in the end it all needs to add up for a lender to approve your rural home financing.  Most home mortgages have a term of at least 15 years – that is a long-term commitment so the data you provide determines whether you receive a “yes” or “no.”

Credit Score
In its most simplistic form, your credit score is a numeric value based off of your credit history.  No history generates no score, so it is important to start building a good credit history that is reported to the credit bureaus.  Paying your bills and loans on time, keeping revolving balances down, and length of credit history all help improve your score.  On the contrary, late payments, high balances, and unestablished new credit tend to pull your scores down.  A credit score of 700 or better is a good place to start but the higher score, the better when applying for a rural home loan.
Commonly known as DTI, Debt-to-Income is another key component to the credit decision.  This number is the relationship between your monthly debt obligations to your monthly income.  Debt examples for the purposes of this calculation are loan payments, credit card payments, auto loans, student loans (even in deferment status) and the anticipated monthly payment of the new mortgage (principal, interest, real estate taxes, & homeowner’s insurance).  Income is your gross income if a wage earner or net income if self-employed.  An old rule of thumb is 36% of your monthly income should cover all your monthly debt obligations.
Cash reserves
Another element lenders pay close attention to is cash reserves.  Lenders want to make sure you have adequate cash reserves to cover the down payment and closing costs of the loan.  It is even better if you can show you have enough to cover six months of monthly debt obligations. This makes a lot of sense if you think about the effects of job loss, reduced hours, or unexpected costs that may come up like a new water heater or furnace.  
Owner equity
Lastly, the borrower’s owner equity is reviewed.  Owner equity is derived from reviewing what the borrower owns (assets) and what they owe (liabilities) to come up with the borrower’s equity.  We recognize this is a challenge for young borrowers just getting started in the working world, but offsetting strengths such as a good job, good credit, and cash reserves help them offset this area, which might be low due to their stage in life. 
Equity is also viewed as a borrower’s staying power. If there is a bump in the road due to loss of job or illness for example, equity can potentially be sold to reduce debt or provide supplemental income if needed.
It is the lender’s responsibility to approve loan applications with a high likelihood of on-time payback, which is mutually beneficial to the borrower and the lender.  Reviewing borrower’s prepayment history, their ability to take on new additional debt (through the debt-to-income analysis), their cash reserves pre- and post-closing, and their equity gives the lender a solid picture of the buyer’s ability to pay off the loan in the agreed upon terms.

If you are thinking about purchasing a home in the country or a small town, please contact one of our mortgage loan officers to help guide and position you to be credit-ready for when you find your dream property.

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