There was a time when qualifying for a mortgage was ostensibly as easy as breathing. Things have changed since then - bubbles have burst and mortgage lenders have gone out of business - and it's more challenging, but certainly not impossible, to qualify for a mortgage.
Mortgage lenders and banks want to lend money to customers who are likely to make their monthly mortgage payments, and make them on time. Generally, banks and lenders don't want to be in the real estate business, but when homeowners default on their loans, they have little choice. It should be little surprise, then, that lenders take a long look at the financial strengths of potential borrowers before approving mortgage loans. Here are three main factors lenders review to determine if you're qualified for a mortgage loan.
Your three digit credit score is an important number. Lenders consider this score when determining whom to lend money and at what interest rates they should charge. If your credit score is low, you might not qualify for a mortgage from conventional lenders. And if you do qualify, with a score like that, you may have to pay higher interest rates. That's because borrowers with low credit scores have a history of missing car loan, credit card or student loan payments. They might also have a bankruptcy or foreclosure in their past, or maybe they are saddled with high credit card debt. All of these will lower a credit score, and lenders are wary about passing out mortgage money to borrowers with a history of bad credit.
If your credit score is high, you'll dramatically increase your odds of both qualifying for the best mortgage loan products and nabbing the lowest interest rates.
Lenders will also look at your finances to determine if you are worthy of their mortgage dollars. Specifically, lenders want to determine the size of your gross monthly income - your income before taxes are taken out - compared to both your mortgage and other debts. To do this, lenders will consider two ratios, your front-end and back-end ratios.
The front-end ratio looks at how much of your gross monthly income is taken up by your monthly mortgage payment - including principal, taxes and insurance.
The back end ratio considers all of your debts - everything from your mortgage payment, to your student loan payments to the minimum amount of money you're required to send to credit card companies each month. The goal is to make sure that your monthly debts aren't so high that they'll overwhelm you financially once you add a monthly mortgage payment on top of them.
Lenders will also look at your employment history before lending your money. Most lenders prefer to work with borrowers who have spent at least the last two years in the same industry. They're even more excited by borrowers who have worked with the same company for those two years. Lenders view this as a sign of stability. And they far prefer lending to borrowers whom they view as stable.
What happens if you're self-employed? You'll have to work a little harder to convince lenders that you have a stable stream of monthly income. You'll probably have to submit copies of your last three years worth of tax returns to show them that your annual income, even though you've been self-employed, has been steady.
If you don't qualify
If you don't qualify for a mortgage loan right now, don't panic. You can always work to improve your finances before trying again. It's possible, for instance, to boost your credit score by paying your bills on time. You'll also have to lower your amount of credit card debt or pay it off completely.
Improving your credit score will take time - months, if not longer - but it can be done. You just have to make good financial decisions.
You can also better your debt-to-income ratios by paying down your debts and seeking ways to boost your gross monthly income such as getting a better job or a raise. At the same time, you can make yourself look more attractive to lenders by holding down your present job for a year or two before applying again for your mortgage loan.
In other words, don't give up. You can still be a homeowner one day.
© Fintactix, LLC 2013