Look for Loan Before Looking for House

Spring is here, and with it comes the start of the prime home-buying season.

But before you start visiting open houses or touring new models, make sure that you have your own financial house in order.

Giving your credit record a checkup and making a few other moves now will make the loan-application process run smoother and may even bolster your chances of getting the financing that you’ll need to close a deal.

“Buying a house and then going out to look for a loan is like putting the cart before the horse,” said Gary Cain, a manager with Stockton-based lending giant American Savings Bank.

“Gathering up all your documentation now and getting the ball rolling on your loan can save you a lot of time and trouble later.”

Even if you haven’t picked a lender yet, you can get a fairly good idea of how much you’ll be able to borrow by analyzing your income and current debt obligations.

First, figure out how much you earn on an annual basis. Include your salary, as well as any bonuses or commissions you get and alimony or child-support payments that you collect.

Once you have totaled up your annual income, divide the figure by 12 to get an average of how much you gross each month.

As a general rule, no more than 28% of your gross monthly earnings can go toward your housing-related expenses.

So if you earn an average $3,500 a month, you’ll be allowed to devote up to $980 a month ($3,500 x .28 = $980) toward principal, interest, taxes and insurance--”PITI,” for short.

In addition, your total debt obligations--including your mortgage payment, auto and student loans, minimum credit-card payments and the like--can’t exceed 36% of your gross income. So, your total debt couldn’t eat up more than $1,260 of your $3,500 monthly paycheck.

Of course, these percentages are only general guidelines: Most lenders will accept slightly higher figures if your credit is especially good or you’re making a large down payment.

Once you have a ballpark idea of how much you’ll be able to pay each month, order a credit report on yourself from TRW, Equifax or some other large credit bureau. You can usually find them under the “credit reporting agencies” heading of your local Yellow Pages.

For about $10, the bureau will send you a computer printout that’s much like the one the lender will look at when it’s trying to establish your credit worthiness.

If the report has any discrepancies--for example, if a car dealer erroneously claims that you missed a loan payment a few years back--contact both the creditor and the bureau immediately to correct the error.

Even if you really did miss a payment once or twice because you got in a financial jam or a dispute with the creditor, send a letter to the credit bureau to explain your side of the story.

“We would tend to be a little more lenient with a borrower who took the time to explain a dispute to the credit bureau than we would if he just never paid his bills and never bothered telling anyone why he wouldn’t,” said Tim Johnstone, a manager for Chase Manhattan Personal Financial Services in Pasadena.

Also start gathering up the documentation the lender will need to verify your income and expenses.

Although requirements vary from one lender to the next, you’ll probably have to provide complete copies of the tax returns that you have filed for the past two or three years, or at least show the loan officer back-copies of your W-2 or 1099 forms.

If you work for a company, expect to provide your most recent pay stubs to verify how much you have earned so far this year. If you’re self-employed, you’ll need an updated profit-and-loss statement for your business.

You’ll also be asked to list all your bank accounts, debt obligations and the like. Make sure you have the name and address of the office where each account is held, as well as all account numbers.

“You’d be surprised at the length of time your application can be delayed simply because you forgot to include a few account numbers or addresses that you probably have right at your fingter tips,” said Dennis R. Eickhoff, president of San Diego-based Advanta Mortgage Corp.

If you’re planning to get part of the down payment from your parents or other relatives, it’s a good idea to get the money now and put it into your personal bank account.

That’s because lenders typically check for the average daily balance in the account for the past three or six months: The higher the average, the better chance you have of getting the loan.

If the money that you get from your folks is an outright gift, the lender will want them to sign a “gift letter” stating that the cash won’t have to be repaid.

But if the money is simply a loan that you’ll have to pay back, the lender will probably want to see a letter or contract that clearly spells out the terms of the agreement between you and your parents.

Remember, too, that the lender will factor the monthly payments that you’ll make to your folks into your overall debt obligations. That will probably lower the size of the loan that the lender is willing to make.

Here’s a recap of other tips that lenders offer to make your loan hunt go smoother:

* Don’t make any “big-ticket” purchases until after your escrow closes.

“Having as much money in the bank and as little debt as possible will improve your chances of getting the loan,” said Michael Graves, a regional manager for La Jolla-based American Residential Mortgage Corp.

* Don’t change jobs now, unless it would be a promotion and you’d make more money. Lenders tend to favor applicants who have been steadily employed in the same line of work, especially if they’ve been moving up the career ladder.

* If your employment history for the past several years shows long gaps between jobs, be ready to explain them.

Copies of letters or resumes that you sent to prospective employers can show the lender that you were actively looking for a new job. Medical bills or disability papers can prove that you were injured or too sick to work.

* Consider having two or three lenders “pre-qualify” you based on your income, debt obligations, size of your down payment and other factors.

When you get pre-qualified, the bank will tell you exactly how much you can borrow--important knowledge that can help you avoid looking at homes you can’t afford.

Once again, it’s worth remembering that different lenders require different types of paper work and adhere to different loan guidelines. So even if one or two financial institutions turn down your loan application, you’ll probably be able to line up financing somewhere else.