Deciding that you are ready to buy a home is an exciting first step, but you won’t be able to proceed with the home buying process until you have gotten a lender onboard. Many people are surprised when they head to the bank and find out that they don’t meet the strict criteria to qualify for a mortgage. Here is a look at four common barriers that you may need to overcome in order to secure a home loan.
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1. Bad Credit or No Credit
Easily the most common reason why you might be denied a mortgage, credit woes can put a halt to your home-buying ambitions before you even get the process started. Over the years, you may have gotten lazy about always paying your credit cards on time or spent a little more than you could afford. Unfortunately, while this sort of behavior may feel like it shouldn’t be a big deal, blemishes stay on your credit report for seven years. A mistake you made when you were 25, therefore, could still keep you from getting a loan when you’re 30.
Many other people make the classic mistake of not building up a credit history at all before they want to buy a house, but having no credit hurts your chances of getting a loan about as much as having bad credit. While credit cards and loans can be dangerous if you aren’t financially responsible, they are a great way to build your credit score when you’re young. By staying on top of your smaller financial commitments for a number of years, you can prove that you are ready to handle the responsibility of a major loan.
2. A Small Down Payment
A very small percentage of the home-buying population can qualify for mortgages with either no down payment or a small down payment, but the majority of lenders want you to put down at least 10 percent (and often more like 20 percent) in order to secure a home loan. While it may be disheartening to realize that you haven’t saved enough money to start your house search, this barrier is one of the easiest ones to overcome. Often, by just putting off the beginning of the process for another 6 months or a year and working as hard as you can to pinch pennies, you will be able to build up your savings enough to qualify sooner rather than later. If you are really gung-ho about starting your search right away, you can also do some research to find out if you qualify for an FHA loan–in which case you will only need to bank a 3.5-percent down payment to seal the deal.
3. Bad Debt-to-Income Ratio
It becomes easy for banks to “prove” that you can’t afford a mortgage if your debt-to-income ratio is already too high when you apply for your loan. Think about the monthly commitments you are currently responsible for (which can include student loans, car loans, and credit card debt). Divide that number by your gross monthly income, and you will come up with the same ratio that your lender will be scrutinizing. You will start running into trouble if your debt-to-income ratio is greater than 35 percent before applying for your mortgage because the bank starts to worry about your chances of defaulting. The easiest way to remedy this issue is to pay down old debts. You also should avoid making any major purchases that require financing until after you’ve already bought your house.
4. Employment Problems
Your lender will investigate your employment situation beyond just checking whether or not you are steadily working. If you have changed jobs very frequently or were recently laid off, you may find that your bank doesn’t see you as a stable enough candidate for a loan. Often, lenders will require two years of consistent employment with the same company in order for you to qualify. Many self-employed individuals also have trouble securing mortgages because it can be difficult to prove that you have enough “qualifying income.” If you are a small business owner or independent contractor, you will need to establish a very strong paper trail showing your sources of income, and you shouldn’t be surprised if you are forced to undergo a much more thorough level of scrutiny from your bank.
While all of these barriers can be tough to accept–especially when you are anxious to move forward with the home-buying process–none of them are insurmountable. Often, by changing your habits and waiting a few months, you will be ready to apply again in no time. Getting mortgage approval may be tough now, but soon you’ll get past this step and start searching for your dream home.