If you are thinking about getting a second mortgage, you may discover that you just don’t qualify.

The Wells Fargo formulas for deciding whether you will be offered an increase in a home equity line of credit are making it more difficult for the average American.  Self employed business owners seem to be affected deeply.

If you were caught up in the economic problems that started in 2008, you may have lost your job and had to look for other work or make other plans. So maybe it wasn’t the end of the world for you, but it wasn’t fun either. So you try something new and decide to go into a new type of work or something totally different than you were used to doing. You end up building your own business and it doesn’t start off with a bang, but hey, it pays the bills. Good for you.  You helped yourself cope with a difficult situation.

So your business begins to grow and your 2009 income isn’t too bad.  In fact it’s rather decent so you want to do the best thing for your financial situation by consolidating your debt and getting rid of any credit card debt so that while you are working to pay off debts you are getting a lower interest rate and can use the interest you pay to lower your taxable income.  That would help you out.

Well, 2010 comes along and you’re business is really doing well. The best you could have ever hoped for and it’s growing. Congratulations! Great news. Life looks better in 2010 doesn’t it?

Not to Wells Fargo. Wells Fargo uses this procedure to decide whether they can increase your home equity loan. They require that you send in two years of tax returns. Well, remember that in 2008 with your new business just starting, you may have made over $10,000  and had $4,000 in deductions. Now Wells Fargo says that well in that year, you get credit for making $6,000.  They won’t even count the rest of 2008 because it was in a different field. They then divide that by 12, because of course that is how many months there are in a year.

So they calculate that you are making $500 a month.  Do they consider the 2009 income at all?  Well sure they do, but because there is such a huge discrepancy, they have to go with the smaller amount of money that was made in 2008. But they will give you what they call a cap of 125%. They then multiply 125% times the $500 a month and come up with a $626.25 figure . That is the new figure of how much they think you make per month, regardless of what you made in 2009. Isn’t that smart?

Then they look at your current minimum payments for your mortgage, association fees and revolving credit and come up with your debt to income ratio. It doesn’t take a rocket scientists to figure out that most mortgages will exceed $626.25, so right there you’ve gone over 100% debt to income ratio and they come to the brilliant decision that they shouldn’t give you a loan, because well…your debt to income ratio is too high.

For people who have the guts to start their own business and pursue it, you are going to have to have to know that it is pretty useless to try to borrow any money until you’ve had a solid two years of income that they can wave their magic formulas on to predict what you will do in the coming years.

It’s a good thing that entrepreneurs have more insight and determination to grow a business than the banks have to risk lending their money to you.

To apply for a home loan, banks normally check the applicant’s background, whether they have a good, steady job or some other stable source of income. Credit line is also checked, whether the applicant has been responsibly paying his/her debts well. An applicant must also have collateral as financial back up, as an assurance that the applicant will be paying back the loan in full.

Do some research on how much you can ask from lenders.  This will give a general idea in figures of how much you can borrow, how much of your income is needed for the down payment as well as for the succeeding payments. Evaluate how much you can afford to spend for the house loan, in consideration with other existing monthly payments. It is recommended that less than a third of the applicant’s monthly income be spent on the payments for the loan and property.

Start saving money for the purchasing of the house before attempting to apply for a home loan. Possible ways of saving for the home loan and property purchase include taking a second job or reducing unnecessary expenses. This initial investment is a good demonstration to the lender of the applicant’s good intent in purchasing a house. There are also other options to be considered in obtaining financial support when purchasing a house such as the Veteran’s Administration loan for veterans. Consult with your real estate agent regarding other financial support options.

As a result of the recent development in the economy, banks are becoming more stringent in assessing applications. However, there are ways of improving chances when applying for a home loan. In order to prepare for qualifying for a home loan, it is recommended that the applicant obtain a copy of their credit report from a qualified agency. There are services which can send a report annually or directly contact the agencies for an immediate copy. Take note of outstanding or unpaid credit, as this is an important aspect that banks check for. Pay back all debts. If this is not completely possible, then make it as low as possible. This is important as it sends a note to the lender of the applicant’s reliability in paying back the loan.

Banks normally ask for collateral as an assurance that the applicant will pay back his/her loan. Other properties in real estate or investments in the stock market are possible sources of collateral.

There are no definite rules that can assure the applicant will obtain the home loan. Loans are approved on a case to case basis. However, following these tips increases the chances of getting the home loan. Do not despair if you are denied a home loan but see it as a sign that there may be areas in your application that need improving.

Having the advice of someone who is an economist from Quicken loans, is probably a little better than the advice I can get through my local connections.

So Bob Walters, from Quicken loans, if you say that “Homebuyers and homeowners looking for a new mortgage need to navigate this uncertain market carefully,” I will take heed. I’m not really looking for a new mortgage but for those of you that are, well…proceed with caution.

Richard DeKaser, chief economist for National City Corp., tells us that we as consumers should avoid that telemarketer offering refinancing. He says we should stick with known performers, so ask your friends for referrals.

He is also predicting, 30-year-fixed interest rates to grow from 6.25 percent to 6.75 percent over the next year, so if you have a “risky mortgage” now is the time to refinance, but not with that pesky telemarketer.

What do you think?
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