Do you need to improve your credit score to qualify for a mortgage loan? Whether you want a mortgage to refinance or purchase a home, it’s important to straighten out your finances before filling out a loan application. Here’s what you need to do.

• Ditch credit card debt. This is one of the smartest things you can do to boost your credit score. Mortgage lenders won’t approve you for a home loan if your debt-to-income ratio is too high. Debt payments should account for no more than 36% of your income, and mortgage debt shouldn’t be any higher than 28% if you expect to qualify for the best mortgage rates.
• Pay your bills on time every month. Consistently being late with bill payments lowers your credit score. Read your monthly statements carefully so that you are aware of the date and time that payments are due. Payment history accounts for 35% of a FICO score.
• Avoid running up balances on existing credit cards or lines of credit. Even if you have enough income to pay off your debts at the end of the money, running up credit lines may mark you as a credit risk with mortgage lenders. Put the kibosh on new purchases at least until after you get approved for a mortgage.
• Check your credit report for errors. It’s not uncommon to find inaccurate or outdated information on credit reports. Dispute any problems that you find with the credit agency by calling and following up with a letter. If necessary, contact creditors to straighten out problems. Review your report again after your dispute has been settled to make sure everything has been updated.
• Keep your oldest credit lines open to show that you have an established credit history. While it makes sense to close unused credit lines if you don’t want to be tempted by them because of a history of overspending, wait to do so until after you get a mortgage. If you’ve had a long history of managing credit well, it can help lift your credit score.

Free Credit Reports

Request a free copy of your credit report at www.annualcreditreport.com. You can get one free copy every 12 months from Equifax, Experian, and TransUnion. Review it carefully and take time to fix any problems in order to qualify for the best possible deal on a home loan.

Home equity loans have a higher delinquency rate than all other types of consumer loans, according to data from the American Bankers Association. According to an article in the New York Times:

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Home Equity Loans and Falling Property Values

Some homeowners who’ve fallen behind on home equity loans are likely to threaten bankruptcy if lenders try to collect. Also, because property values have dropped so much, many borrowers don’t see the point of trying to pay off home equity loans. Some homeowners are even willing to walk away from their homes and let them be foreclosed upon rather than pay off home equity loans and mortgages.

Settling Unpaid Debt

In some cases homeowners have arranged debt settlements for home equity loans. Before going this route keep the following things in mind:

• You must be behind on home equity loan payments before the lender will talk debt settlement
• In some cases your loan must already be in collections to work out a settlement
• Even if you settle a home equity loan, you may owe taxes to the Internal Revenue Service for the forgiven portion of debt
• Debt settlement is going to ding your credit score

Sell Your Property

It may make more sense to do whatever you can to sell your property and get rid of your home mortgage and home equity loan. Of course the housing market isn’t doing so great in many places, but you may be able to get your mortgage lender to agree to a short sale. A short sale occurs when the mortgage lender agrees let you sell for less than what you owe on your home loan. The holder of your home equity loan would have to agree to a short sale as well.

It’s possible that there is a home buyer out there who would be thrilled to get your house at a bargain price. In the long run it would be better to sell your home this way than to end up in foreclosure or bankruptcy, or spend more time stressing over all your unpaid loans.

You’ve probably heard a lot of doom and gloom about the prospects of getting a mortgage these days. But just because mortgage lenders have gotten more strict about lending money doesn’t mean you can’t get approved for a home loan. Use the following tips to improve your chances of getting a home loan before filling out an application.

1. Get your finances together. Before you even approach a mortgage lender about getting a loan it’s important to make sure you have a strong financial profile. Pay off as much debt as possible to lower your debt-to-income ratio. Mortgage lenders are unwilling to lend money if you already have too much debt relative to the amount of income you have to pay it back. Generally, it’s recommended that you have no more than 36% of your income going to debt, and only 28% of it should be for mortgage payments.
2. Sock away money for a down payment. The more money you have saved up the better off you are. Aim to save a down payment of at least 20% to avoid mortgage insurance (MI), which is paid on top of principal and interest payments. Also, a larger down payment is viewed favorably by mortgage lenders.
3. Review your credit report. Your credit report is a key piece of information that determines whether or not you get approved for a home mortgage. This information helps determine what credit score you receive. Credit reports should be reviewed carefully before applying for any type of loan to make sure all the information is accurate.
4. Put together a team of experts. A real estate agent with access to the Multiple Listing Service (MLS) can help you hunt for a home, but there are other professionals you should consider working with. An attorney who specializes in real estate can review all of your contracts and handle the processing of important documents. You should also find a qualified housing inspector to make sure there are no structural problems or other issues with the property you plan to buy. Even if you haven’t found a house to purchases yet, assemble your team to avoid wasting time when you find a property.

Getting the right mortgage to buy a home requires careful planning and preparation. Current mortgage rates are at all time lows, but if you aren’t properly prepared you won’t be able to take advantage of them. If you are ready to begin comparing mortgage rates you can do that here.

Low mortgage rates should bring out a stampede of home buyers looking for a deal with housing prices so much more affordable than a few years back. But that’s not happening as many potential buyers stay on the sidelines or can’t get approved for a home loan.

Mortgage Rates at All-Time Lows

Despite the fact that current mortgage rates are averaging 4.56% for a 30-year fixed loan — the lowest level ever — consumer confidence and home builder confidence have dropped. Mortgages rates for 15-year fixed loans are averaging 4.03%.

Frank Nothaft, Freddie Mac’s vice president and chief economist, said in a statement:

The decline in mortgages rates over the past few weeks echoes the recent signs of weakening confidence in the strength of the economy, particularly the housing and consumer sectors. For example, homebuilder confidence declined in July to lows not seen since April 2009, as measured by the NAHB/Wells Fargo Housing Market Index, following the large drop in housing starts reported for June.

Falling Home Values

Home values throughout much of the country have fallen and are expected to show more declines, although some economists say the worst of the housing crisis has passed.

Consumer confidence fell as many folks continued to worry about unemployment and overall conditions in the economy. The Conference Board’s Consumer Confidence Index dropped to 52.9 in June from 62.7 in May.

According to Lynn Franco, director of the Conference Board Consumer Research Center:

Consumer confidence, which had posted three consecutive monthly gains and appeared to be gaining some traction, retreated sharply in June. Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence. Until the pace of job growth picks up, consumer confidence is not likely to pick up.

Current Refinance Rates

Despite the concern about the economy, some homeowners are taking advantage of the low mortgage rates to refinance home loans. Doing a home refinance could make sense if it can significantly lower your monthly payments or get you out of a mortgage with adjustable rates.

You can begin gathering quotes for mortgage refinancing here. If you have a stable income, strong credit score, and equity in your home you may be able to qualify for a home refinance despite concern about where the economy is heading. 

When you apply for a home equity loan the lender requires that your home be used as collateral. This type of loan is considered a second mortgage.

Decline in Home Values

Some homeowners have had a difficult time qualifying for home equity loans during the credit crunch because of falling home values. But if you have good credit and a decent amount of equity, there is a chance you can get approved to borrow money.

It’s never a good idea to borrow money if you don’t need to. But if you are house rich and cash poor, a home equity loan can be useful if you need to make home improvements, pay college costs, or even consolidate high-interest debt.

When considering a home equity loan keep in mind the following pros and cons. Pros include:

• Home equity loans usually have much lower interest rates than credit cards and rates are often fixed.
• Interest paid on home equity loans is tax deductible.
• Depending upon how much equity you have you may qualify for a sizable amount of money.

Among the cons of getting a home equity loan are:

• If your property values declines significantly, you could end up owing more on your mortgages than your home is worth. This is commonly referred to as being upside down on a mortgage.
• Borrowing money by using your home as collateral is risky. If you can’t afford to keep making payments on a home equity loan, you could end up losing your property.

Access to a Line of Credit

Keep in mind that home equity loans differ from home equity lines of credit (HELOCs). A line of credit also allows you to tap into your home equity, but it is set up so you can draw on the money as you need it instead of taking a lump sum. Both home equity loans and HELOCs usually have shorter terms of repayment than first mortgage loans.

Tighter Lending Standards

Some people who were previously approved for HELOCs have had their lines of credit frozen because banks have tightened up on lending. In other cases people who have strong credit histories have been denied HELOCs because banks are reluctant to extend credit.

Shop around to compare home equity loans to find the best deals. Familiarize yourself with all the terms before signing up.

Think the rich are immune to the housing crisis? You would be wrong. According to the New York Times, “more than one in seven homeowners with loans in excess of a million dollars are seriously delinquent.”

Walking Away from Home Loans

CoreLogic compiled data that indicate that people with less expensive homes are more likely to continue making payments to mortgage lenders. “Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment,” the article states. Sam Khater, CoreLogic’s senior economist, was quoted as saying, “The rich are different: they are more ruthless.”

Strategic mortgage defaults have become more common as the housing market has struggled to recover. Some homeowners have simply stopped paying on mortgage loans because  they see no point in putting money into properties that have lost significant value. It’s not that they can’t afford to make payments on home loans, they just don’t want to.

Falling Home Prices

According to a recent article on Freddie Mac’s Web site, many strategic defaulters live in states where housing prices have suffered huge drops. Walking away from homes, the article argues, hurts entire communities in the long run:

That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.

Let’s start with the neighbors. When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. 

Average Joe and Jane

Ultimately, it’s the average homeowner who is likely to be affected the most. A middle-class family that loses a home through foreclosure is likely to struggle for years to rebuild a stable financial situation.

Defaulting on Mortgages and Still Living Large

When people with million-dollar properties default on home loans, they often continue to have access to other financial resources and investments. They may even have a second or third home to move into and continue to live a pretty comfortable lifestyle.

Avoid Defaulting on a Mortgage

Whatever your income level or home’s value, it’s best to do everything you can to avoid defaulting — strategically or otherwise. Alternatives to strategically defaulting include resigning yourself to making mortgage payments even if you’ve lost a lot of home equity and waiting for the market to recover.

You could also try to refinance your mortgage loan to lower your payments and interest. Finally, if necessary, do whatever is necessary to sell your home to get rid of mortgage payments.

First-time homeowners sometimes make the mistake of not adding up all the costs of getting mortgage loans. Of course shopping for competitive mortgage rates is important, but keep in mind that your monthly payment includes real-estate taxes and homeowners insurance. Anytime you use a monthly payment calculator to figure out the cost of getting a home loan, it’s important  to include your best estimates for insurance and taxes.

Property Taxes

You can’t deduct your homeowners insurance premiums, but you can deduct real-estate taxes. Deductions can be taken for any state, local, or foreign taxes on real property. If your state or county imposes local benefit taxes related to property improvements such as sidewalks or streets, they cannot be deducted.

After you’ve owned a home for a while, you can file an appeal to try and get your property taxes lowered if you think you are paying too much. You must contact the local government to find out what the procedure is for appealing property taxes. Generally, you only have a certain window of time to appeal after receiving your annual assessment.

Mortage Interest

The interest paid on a home mortgage is also deductible. Interest on mortage loans can be deducted for your principal residence and for a vacation home. If you have a second home that is also rented out for part of the year, you must use the house for more than 14 days or more than 10% of the number of days during the year that the home is rented at fair value. If you have more than one property that you rent out, the mortgage interest deduction can only be taken on one of them.

Deductible interest must be paid on a mortgage for your first home, second mortgage, home equity loan, or home equity line of credit (HELOC). If you pay mortgage interest for someone else but are not legally liable for the loan, you cannot take a deduction for that amount.

Filing Your Taxes

When filing your income taxes on Form 1040 you have to decide whether you are going to take the standard deduction or itemize deductions on a Schedule A. The best rule of thumb is to itemize deductions if they add up to more than the standard deduction. But unless you choose to itemize you won’t be able to deduct interest from your home loan or real-estate taxes.

If you were expecting mortgage rates to begin rising this year, you may have to wait a while longer. Current mortgage rates are surprisingly low, with 30-year fixed-rate home loans averaging 4.86% and 15-year rates averaging 4.24%. Many economists had expected mortgage rates to rise to around 6% this year, but the European debt crisis has resulted in investors pouring money into American bonds, which has helped lower mortgage rates.

Time for a Home Refinance?

The lower mortgage rates mean you can still get a good deal on a refinance. “It’s another very good opportunity for anyone who hasn’t yet been able to refinance — or has missed other chances,” Keith Gumbinger, vice president of HSH Associates, told MarketWatch. “Rates have unexpectedly returned to near 50-year lows due to the overseas mess, but it’s worth noting that such sudden declines have proven fleeting in the past, with rates bouncing higher just as soon as a permanent (or potentially permanent) solution has been identified.”

Get a Mortgage to Buy a Home

Current mortgage rates are also good news for people applying for a loan to purchase a home. Getting pre-approved for a mortgage loan can improve your chances of having an offer for a house accepted by the sellers. Some real estate agents won’t even work with you unless you have a letter from a mortgage lender that shows you have been preapproved for a home loan.

You can search for mortgage rateshere to get started on the process of getting preapproved. Getting a preapproval letter doesn’t mean you have to actually apply for a home loan with a particular mortgage lender when you are ready to buy. Any preapproval you get probably expires in about three months time, but you may be able to get an extension if necessary.

Documentation Is Important

 Whether you want to do a home refinance or buy a house, you need to provide documentation of your income to mortgage lenders. You need to show proof that you are employed or have a steady income. Mortgage lenders also want to know that you aren’t carrying too much debt relative to your income. Among the financial documents you might have to provide are tax returns, W-2 statements, bank account statements, and recent pay stubs.

Don’t Waith Too Long

Current mortgage rates are very attractive if you want to refinance or buy a home. But don’t expect mortgage rates to remain at such low levels for the long-term. Get moving if you want to lock in a mortgage deal before interest rates begin rising.

Reverse mortgages have fans and critics. These home loans allow people 62 and older to borrow against the equity in their property. Here are some of the pros and cons for reverse home loans.

Pros of Reverse Loans

It can be difficult to cover all your financial obligations if you don’t have enough money coming in each month. Many seniors use reverse mortgages to supplement their income. Some advantages of these loans are:

1. Money borrowed doesn’t have to repaid until you move or die. There are no monthly payments as with a traditional mortgage loan.
2. You can use reverse mortgage proceeds for any purpose, including medical bills, debt, or home repairs. The money can be received as a lump sum, through installments, or as a line of credit.
3. The amount you can borrow increases as you age and as your home value rises. A reverse mortgage counselor can help figure out how much you might be able to borrow.

Cons of Reverse Home Mortgages

Reverse loans have some drawbacks you should be aware of:

1. Borrowing money this way can decrease the inheritance you leave behind for you kids. If leaving a home or other assets to your heirs is important, consult with an estate planner to decide if a reverse mortgage is a good move.
2. Reverse mortgages use negative amortization, so the balance grows over time. People who receive the money through a line of credit could have the option of paying back some of the money as they go along to cut the balance owed.
3. There are limits to how much you can borrow with a reverse loan. Currently, the limit for a Home Equity Conversion Mortgage (HECM) is $625,000.

Reverse Mortgage Counseling

Reverse mortgage loans should be considered carefully and used as a last resort for finding a new income stream. Before applying for a loan you must receive counseling from a Department of Housing and Urban Development-approved counselor.

A counselor can review your finances and determine if there are alternatives to reverse loans that may be more helpful. Search for information on reverse loan counselors in your area at the HUD Web site.

Compare Reverse Loans

It’s important to get as much information about reverse loans as you can before starting the application process. Compare different loan offers to decide if borrowing money this way is right for you.

Don’t waste time and money when buying a home. Avoid making the following mistakes when purchasing a property.

1. Not setting a budget. Do you have caviar tastes on a crackers and cheese budget? Run the numbers on your finances before heading out to look for a home.  That way you can shop within your budget and won’t experience delays when applying for a mortgage. It’s also important to buy a home within your means. Bigger may seem better until you’re struggling to make the mortgage payments and keep the heat on.
2. Not getting pre-approved for mortgage loans. A pre-approval letter shows that a mortgage lender is committing to give you a home loan. This puts you in a better position to negotiate a deal.
3. Letting emotions take over. Buying a home is probably the biggest purchase you’re going to make in your life. Don’t let your emotions cloud your judgment. If you see a lot of red flags and feel uncomfortable with a deal, don’t ignore those feelings. While you may think you’ve found your dream home, there are other properties out there. 
4. Trying to time mortgage rates. When it’s time to get a home loan, compare current mortgage rates from several mortgage lenders to find the best deal. If you’ve done everything you can to clean up your credit, and save up a nice down payment, you should qualify for a competitive mortgage rate regardless of what’s happening with the economy.
5. Signing contracts without understanding them. Many homeowners caught up in the subprime mortgage mess claim they just didn’t know what they were getting into when they purchased property. You may not be a legal expert, but you must pay one to represent you. Hire a knowledgeable attorney who can review your contract and look out for your interests.
6. Not getting a home inspection. Even if a house looks perfect, there are bound to be some type of problems lurking about. In fact, some new homes could even have problems that wouldn’t be found without a home inspection. Your housing contract should allow for contingencies related to the home inspection.
7. Not taking advantage of programs that help you buy a home, such as the government’s homebuyer tax credit of up to $8,000. Many communities also have programs targeted at first-time homeowners or other information sessions.

Becoming a homeowner can be exciting and scary all at the same time. Learn as much as you can about the process and find reliable professionals for your team to make the home buying process as smooth as possible.