Lenders consider several factors when assessing a mortgage application. A borrower’s stable source of income isn’t a ticket to their instant approval. A huge take-home pay is ultimately useless if it’s spent on repaying other debts.
If you’re looking forward to getting a favorable home loan, your financial records should impress your prospective lender. Your credit score, a three-digit number that is the result of your credit file analysis, will determine your capacity to repay. If a lender sees a low credit score on your credit file, don’t be surprised if you got denied.
Other than showing a lender a good credit score, you also have to change some aspects of your lifestyle. If you often shop for unnecessary things using your credit card, for example, that may also hurt your credit score. So to avoid increasing your chances of denial, note these Dos and Don’ts before applying for a mortgage:
Do: Check Your Credit Score
Lenders find out your credit score by obtaining it from either of the three major credit bureaus: Experian, Equifax, or TransUnion. But you can also check your credit score. Seeing your credit score in advance allows you to predict whether you’ll get the loan. In addition, it lets you spot potential fraud or errors in your credit file.
You’ll see two types of results in your credit file: Your credit score and your credit rating. The credit score is the numerical figure, while the credit rating is the “verdict”. Each range of scores has a corresponding rating, shown below:
- 300-579: Very Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
If you have a very poor or fair credit score, you can still improve it. Pay your bills on time, and don’t acquire any more debt. Good financial habits increase a credit score.
Don’t: Take Out Other Loans
Aside from lowering your credit score, taking out other loans also affects your ability to repay the mortgage. If you’re a lender, you wouldn’t trust a borrower with several other debts to pay, will you?
But if your current debt repayments aren’t exhausting your savings, you may still have a good chance. Try calculating your debt-to-income ratio. Add all your monthly debt repayments, and divide them by your gross monthly income. Note that “gross” means no deductions yet. So if your monthly take-home pay is $5,000, and your credit card debt is $200, and your student loan $400, your DTI ratio is 0.12, or 12% of $5,000.
Mortgage lenders prefer a DTI ratio of less than 36%. But no more than 28% of that should go to your mortgage payments. If you maintain a good DTI ratio, a lender may approve your application.
Do: Stay in a Company That Pays You Well
Lenders will also look at your work history. If you frequently change jobs, and your income fluctuates because of it, your lender may throw away your application.
Typically, lenders favor borrowers that have been working for at least two years in a company that gives them a steady income. If you’re not an employee, you have to present proof of income from another source, like a business or freelance work.
Don’t: Get Another Credit Card
Credit card debt is one of the top factors that decrease the likelihood of your application’s approval. If you can’t use your existing credit cards before applying for a mortgage, that means you shouldn’t get a new one, too. Even if you don’t plan on using your new credit card, you can’t prove that your lender by simply claiming it. Play it safe by avoiding the temptation of shopping on credit.
Do: Maximize Your Savings:
You will definitely encounter certain out-of-pocket costs when buying a new home. There’s the mortgage down payment, then the hidden costs of your new abode. Furnishing the interiors would also blow up your expenses. So, reduce your monthly spending, and focus your savings on your new home.
Don’t: Choose Fix-Upper With a Terrible Condition
Some fix-uppers are still decent, but others can be terrible that they don’t look habitable at all. Such a house may come cheap, but mortgage lenders wouldn’t want their money in it. Even if you can restore the house’s former glory, a lender might just see a bad real estate deal.
Hire a real estate agent as you shop for a new home. They will help you recognize sketchy deals, and narrow your options to homes within your budget and style range. Your agent will ensure that your prospect home will receive a favorable appraisal.
Follow these pointers, and your home-buying journey will proceed smoothly. If your credit score or debt-to-income ratio turns out bad, don’t be disheartened. Take all the time you need to improve your credit first. Don’t feel pressured to buy a home if your finances aren’t ready yet.