Getting a mortgage is not as easy as what it seems. Aside from the loan process that you need to go through, this includes complying with all requirements for you to be qualified and if one goes wrong, are you ready to lose that dream house because you just got rejected?
It is human nature that a person tends to get emotionally attached and gets the feeling of “love at first sight” once in our lifetime. Well, it does seems cliché but can be true to real estate world especially with first time buyers, who are after their “house of their dreams”. Well, let’s burst that bubbles on top of your fancy head right now and be realistic. So, you want to own a home at the same time don’t want to feel the stress of undergoing emotional stress due to denial of loans, here are some ways for you to get yourself prepared and be ready. Assessment time!
IMPROVE YOUR CREDIT SCORE
Depending on the loan type you are availing, getting an “Excellent” or “Very Good” credit score is the way to go. So make every effort to achieve that. This is the most common reason why mortgage will get denied either you have low credit score or lack of credit. For you to qualify, lenders are generally after those who has long credit history. Commonly this goes to first time home buyers.
What you need to see here is that, the lenders need to know if you are financially responsible in handling commitments, and a home purchase is a huge commitment to fulfill. Low credit score also implies late payment history or high balances on their credit cards. If this applies to you, it is advisable to seek professional help from a knowledgeable person on how to improve your credit score.
SUFFICIENT DOWN PAYMENT
While there are some loan programs offering a no down payment or small down payment, most lenders do prefer you to put down 20% down payment or at least 10% for conventional loans as security. Putting 20% down will avoid PMI (Private Mortgage Insurance) which is an additional expense and does not count towards your principal.
PMI is a sort of guarantee fee to protect lender should you default on your loan. Not having enough money to put on the down payment? The best thing you can do right now is save and cut down your expenses. Get back when you’re ready.
HIGH DEBT-TO-INCOME RATIO
This involves your income level and amount of debt you have. To determine if you qualify on this step is to compare the sum of your monthly debt payments to your monthly gross income (debt-to-income ratio). Lenders are up-front to deny your application if they see your debt-to-income is too high. Ideally, you should be having a ratio of 37% or less but lenders will still scrutinize you should they approved your loan. They often re-checks your credit up to closing day to ensure that you haven’t made any financial changes. So avoid making huge purchases that requires financing until after the closing day of your house.
How will you be able to sustain your finances if you don’t have financial stability? Yes, your employment history matters. Investigating your employment history is part of the loan process. Most lenders will require 2 years of consistent employment with the same company. If you are an independent contractor or owns a small business, you will be required more documentation that those who are employed. So start building long term relationship with your company or make sure that you have been consistently been generating positive income for the next 2 years.