Most people will tell you that acquiring a mortgage can be a lengthy, complicated process. Throw into the mix a few credit blemishes or a heavy debt burden, and the path to homeownership can suddenly become an uphill battle.
Before you pick out your dream home and start mentally placing your furniture, it’s important to know if your financial situation will make potential lenders deem you a high-risk borrower. If they do, you don’t have to resign yourself to being a lifetime renter — there are steps you can take to improve your situation and increase the likelihood of being approved for a loan later on.
Tammi Robson, a mortgage broker at Metro Lenders Inc. in Denver, CO, determines loan eligibility using a three-pronged approach. “Approval of a real estate transaction depends on the approval of three things: the borrower’s credit, the borrower’s income, and the house itself. The borrower’s credit must meet minimum guidelines, their income must support their ability to repay the mortgage, and the house they want to buy or refinance must appraise for the amount needed.”
While every situation is different, here are the four major red flags that can cause potential lenders to consider you a risky borrower.
1. Your credit score is below 620
One of the quickest ways for a lender to get a snapshot of your ability to make future payments is to check your credit score and see how you fared with financial responsibility in the past.
You can receive one free report from each of the three credit reporting agencies (TransUnion, Experian, and Equifax) once a year, and some lenders will run an analysis to determine what can be done to bring your score within an acceptable range.
2. You don’t have steady employment or you have less than two years of self-employment income
W-2 employees working a minimum of 40 hours per week are the most attractive to lenders. If you are working part time, or if you don’t have at least two years of tax returns to properly represent your self-employment income, acquiring a loan becomes trickier. For the latter, Robson suggests having a mortgage professional look over your tax returns to determine how much home you can really afford.
3. You have financial responsibilities you aren’t taking care of
While credit scores and income are important, Robson explains that even more pressing are larger issues like delinquent child support payments, unpaid income tax liens, and delinquent federal student loans.
“If serious delinquencies show on a credit report, an underwriter will simply deny the loan,” says Robson. “Therefore, a borrower should bring those accounts current, and/or re-establish a payment history prior to pursuing home loan qualification.”
4. You don’t have a down payment
Lenders prefer that borrowers be financially vested in their new home from the get-go. So if you don’t have a down payment, you’ll have to jump through more hoops to showcase your financial worthiness, and private mortgage insurance will most likely be a requirement of your loan. However, your lender may be able to help you find down payment assistance programs to help bridge the gap.
How can you improve your chances?
When guiding clients through the process of acquiring a loan, Robson has a laundry list of things she suggests they tackle or monitor. Among the top items are acquiring a credit report, working to pay down debt and bring all accounts into good standing, and either securing funds for a down payment or searching for homes that allow 100% financing.
In addition, she suggests avoiding large purchases — like a car — prior to or at any point during the loan approval process. “Many borrowers ask me what is the maximum they can buy that won’t affect their loan qualification,” says Robson. “I tell them $ 30. If it costs more than $ 30, don’t buy it!”
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