So, you’ve thought about whether renting or buying your next home is the right decision for you. If you decide to buy, you’ll likely have to prepare for financing your purchase with mortgage payments. Here’s where things can get a bit tricky.
While getting a hold on the costs involved with home buying can help you determine if you are ready and what you can afford, you also need to prove to lenders that you can and will make your payments. To understand why some people get approved while others are turned away, check out four reasons your mortgage application might not be successful.
1. Poor Credit
If you have a low credit score, lenders likely will be reluctant. If a lending company is willing to work with you despite a rough credit history, it may bump up the interest rate or offer unfavorable terms. But even if you have experienced bankruptcy or home foreclosure in the past, bad credit is not a permanent condition. It’s a good idea to check your free annual credit reports and make sure they don’t have errors. Then, work toward paying down credit balances and make payments on time so your score can rebound. You can also check your credit scores for free every month on Credit.com.
2. Outstanding Debt
Applicants with too much debt often get rejected for mortgages. All lenders have a debt-to-income ratio they work with and if your ratio falls outside the desired proportion, they will not approve you. If you have a lot of debt, it may be a good idea to focus on paying down your debt and/or increasing your income before applying for a mortgage.
3. Unrealistic Expectations
Having an idea about what size mortgage you will qualify for is important. Since affordability is based on various factors, it’s important to understand what you can really afford going into the process. (To understand how much you might qualify to borrow and how much payments would be, try using a free online mortgage calculator.)
4. Employment Doubts
Affordability criteria is taken very seriously. You must have enough income, but also the right type of income. Lenders tend to prefer employment that provides a regular and consistent income. If you are self-employed or work on commission, you may need to prove that you have been profitable for at least two years. If your income is too irregular or there are significant gaps in your employment history, your application might be rejected.
Before you start applying for mortgages, make sure these variables are in order to speed the process and increase your chances for achieving homeownership soon. Consider researching by studying top real estate books and get ready to present your best case for lenders.