How to get a loan when credit is tight

In today’s tight credit market, borrowers need to be in tip-top financial health and have the documentation to prove it. Here’s how to improve your chances of getting a loan with good terms.

Reduce debt. Lenders check how much of your income goes to pay your debts. Paying down big debts, which lowers your debt-to-income ratio, improves the odds that you’ll get a loan, says Jack Guttentag, creator of the Mortgage Professor’s Web Site.

Pay on time. Avoid late payments and take other measures to improve your credit record and score. For advice, go to www.myfico.com. It’s a gradual process that can take months or longer, so start today.

Check your credit report. Look for errors that could lower your credit score. As you probably know, federal law lets you get a free report from each of the three major credit-reporting agencies every 12 months. If you find errors, follow these steps to correct them.

Save up. Mortgage lenders in particular are looking at down payments. Some will want you to put down 20 percent, although you may be able to get a loan for less, depending on the type you’re applying for and your location, says Keith Gumbinger of HSH Associates, a company that analyzes consumer debt markets.

Gather records. Lenders no longer just ask how much you make and how much you spend. They want pay stubs, proof of rent or mortgage payments, copies of bills, and other documents.

Contact lenders beforehand. Learning the requirements for a loan in advance will help you determine how to become a more attractive borrower.

Shop around. Rates and other terms vary widely these days. Prudent lenders that remain well capitalized may be less restrictive than those licking their wounds because of the risks they took.

Borrow from the government. Various programs, including FHA-insured mortgages and federal- and state-sponsored student loans, are alive and, in most cases, well. Many are easier to get and have better terms than private loans. But you might need to tailor your request to meet their requirements.

Don’t overdo it. Even if you’re eligible, don’t accept a loan that you’re not sure you can handle. Follow these benchmarks to keep your borrowing within manageable limits.—Anthony Giorgianni

Comments

[Paul Havemann]

To add to Keith's comments about the down payment: if you're thinking of using gift money as part of the down payment, check with the lender - many want documentation that it's a gift and not a loan.