Whether you are a new homebuyer or someone who has an existing home and is looking to upgrade, it’s important to understand how underwriters look at potential loan applicants, and what kinds of things might raise a red flag and hurt your ability to get a loan or a good interest rate. Here are a few of the most common.
1: Too Much Debt
Most lenders want your new house payments to fall into what is called the 28/36 rule. That means that your mortgage payment should be no more than 28% of your gross monthly income (income before taxes are taken out), and your total debts should not be over 36% of gross income. If you have several other loans or debts, your debt may go over that 36% and could hamper your ability to get a loan for the home you want.
Try to pay down debts before applying for a loan, especially:
- Credit card debt
- Student loans
- Car loans
It’s also important not to take on any new debt or big loans right before a mortgage, so don’t go shopping for that new car until after you buy a house.
2: Unsteady Employment History
You’re not always able to control your employment history, and sometimes whether you have a stable job or not depends on the industry you work in, employers, market conditions, and more. But lenders want to know that you can make your payments, so it’s best if you can show a steady employment history. Changing jobs isn’t necessarily bad, but you will need to prove your income, and if the lender is worried about your job history, they may ask for more proof or a longer job or income history.
3: Negative Credit Reports
Credit reports are a metric that every lender uses to gauge the risk in providing you a loan. Lower scores mean more risk, while higher scores are generally considered safer for a lender. Your credit report shows all your past credit history, outstanding debts, whether you pay your monthly bills on time, and any negative things that have occurred like being sent to collections for failing to pay a debt. The more negative things on your credit report, the less likely you will be able to get a loan. Check your credit score and review the report in detail to make sure it’s all accurate. If something is wrong, you can dispute it and potentially get it removed to improve your score.
The biggest thing to remember is that lenders are looking at your risk, so the more you can show that you are a responsible borrower who will pay back the loan, the more likely you can get a mortgage for a new home. Talk to Integrity First Lending today to find out more about the home loan process and get all your questions answered.