When it comes to getting a mortgage, the discussion almost always boils down to credit score. While that’s a great indicator of someone’s financial stability and habits, is it the only thing mortgage loan officers are worried about?
Thankfully for those with bad credit, there are a variety of factors that go in to the decision of whether or not to give out a mortgage. If you’re struggling to get a mortgage even though your credit is in good shape, read on to find what the culprit might be.
Rental property owner Elizabeth Colegrove of Reluctant Landlord said your debt-to-income ratio is one of the most important factors your lender will check besides your credit score. Debt-to-income ratio is the discrepancy between how much you owe in debt and how much income you generate.
Your ratio should work out to be 45% or less, so your annual debt payments should not be more than 45% of your annual income, according to Colegrove. This figure shows lenders how capable you are of making future mortgage payments, as well as whether or not you have too many outstanding debts.
Cash in the Bank
Buying a home comes with many costs you need to pay for on top of the mortgage, including closing costs, insurance premiums, taxes and homeowners association fees. According to Colegrove, your lender will want to see that you have enough money to cover these expenses for up to six months.
Past Homeownership History
If you’ve previously been a homeowner, the bank will want to see if you paid that mortgage on time. Having a short sale or foreclosure may also preclude you from being approved for a certain length of time.
Factors that may prevent you from getting approved also include applying for a loan that’s more than 2.5-3 times your annual salary, having a shaky work history, and recently becoming self-employed. Lenders like to see stability in an applicant, so being flaky in any areas of your life may turn them off.
Tips for Getting Approved
- Ask someone to cosign. If your profile isn’t as substantial as you’d like it to be, a cosigner can help strengthen your case for a loan. Be aware that you’re asking someone to put their credit score on the line, so make sure you’re able to make all the payments on time and in full. There’s nothing more guaranteed to destroy a relationship than ruining someone’s finances. Check with your lender about the guidelines for a particular mortgage product you’re interested in, as there may be requirements or restrictions when a cosigner is involved.
- Be prepared to apply. Lee Huffman of Bald Thoughts said it helps to have all your necessary documents ready for your mortgage officer. The faster you can respond to requests for more information, the faster your request will be approved. According to Huffman, an applicant will need their two most recent paystubs, previous two years’ W-2s and tax returns, two month’s bank and investment statements, insurance bill, property tax bill and most recent mortgage statement.
- Save a 20% down payment. Not only will a large down payment help you get better interest rates and more mortgage product options, it will show lenders that you’re capable of saving. For people who are self-employed or have other negative circumstances, a large down payment can overcome worries from a nervous lender.
- Pay down debt. If your debt-to-income ratio is one of the reasons you’re not being approved for a mortgage, take time to become debt free before applying for a home loan. If you’ve been saving for a down payment, use some of that money to pay down your debt. By eliminating some of your debt, you’ll also increase your cash flow and prove to a potential lender that you have enough money coming in to pay a mortgage.
Look for less than you can afford. Many people try to buy a house with the maximum amount of money a lender will give them. Try to apply for a loan that’s less than what you might be approved for. That way, you’ll have more leeway in your budget and will have a better ability to repay the loan.
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