Obstacles to Getting a Mortgage (and How You Can Overcome Them)
In many cases a borrower has enough income to afford a monthly payment but they cannot qualify for a mortgage due to a poor credit score or credit history. Lenders typically require that borrowers have a minimum credit score of 580 although it may be possible for borrowers with lower credit scores to qualify for a mortgage. For example, you may be able to qualify for an FHA Mortgage with a credit score of 500 if you make a down payment of at least 10%. Additionally, negative credit events such as bankruptcy, a short sale or foreclosure can make it challenging to qualify for a mortgage. For example, if you experienced a short sale you may not be able to qualify for a mortgage for two years and if you experienced a foreclosure you may not be able to qualify for a mortgage for seven years. Although the waiting periods are shorter if you experienced a job loss or illness that contributed to the negative credit event.
Understand the Credit Score Required for a Mortgage
It is important that you understand your credit score and address any potential credit issues well before you apply for a mortgage. We recommend that you review your credit score six months to a year before you apply for a mortgage. A common question is, does it hurt my credit score when I check my credit score multiple times and the answer is no. You can use services such as annualcreditreport, CreditKarma or credit.com to check your credit score on a weekly or monthly basis without lowering your score. Checking your own credit score is known as a soft inquiry and although this type of inquiry is recorded on your credit report, it does not hurt your credit score. By reviewing your credit score months before you apply for a mortgage you can take positive steps to improve your credit profile such as addressing unknown late payments or potentially reducing your credit card balances.
Please note that your credit score may continue to be impacted by past negative credit events, such as a late payment or charge-off, for a minimum of twelve months. Additionally, it can take one-to-two months for your credit score to reflect positive credit actions, such as paying down credit card debt. That is why we emphasize understanding your credit score many months before you start the mortgage process. Being proactive about your credit profile will help you avoid negative surprises later in the process, qualify for a mortgage and receive the lowest possible interest rate.
Use the FREEandCLEAR Lender Directory to find lenders that offer mortgage programs for credit-challenged borrowers.
Too Much Debt
One of the biggest factors that determines a borrower’s ability to qualify for a mortgage is his or her monthly debt expense. You may make a lot of money but if you have too much monthly debt you may not be able to qualify for a mortgage. Examples of monthly debt include credit cards, auto and student loans as well as alimony and child support, if applicable. The higher your monthly debt expense, the smaller the mortgage you can afford.
Simply put, the best way to address having too much debt is to pay it down or even better, pay it off completely, if possible. We recommend that you pay down the debt with the highest interest rate first, which is typically credit card debt.
When borrowers are thinking about buying a home, they often ask should I pay off my debt or save money for my down payment? The answer to that question partially depends on the borrower’s income level but it usually makes sense to pay down the debt first because paying off debt, especially if it has a high interest rate, makes it easier for a borrower to save money for a down payment and could also potentially improve the borrower’s credit score.
Use our MORTGAGE QUALIFICATION CALCULATOR to determine what size loan you can afford based on your monthly debt expense and gross income
This calculator enables you to determine the maximum level of monthly debt expense allowable to afford the mortgage size you want. Based on the analysis, your may decide to pay down or pay off debt to qualify for a larger loan amount.
Lack of Employment History
Lenders typically want to see that you have two years of continuous employment history (unless you have recently graduated from college or served in the military) before you apply for a mortgage. If a borrower has recently changed jobs and the new job has a probation period, the lender may wait until the probation period is over before approving the borrower for a mortgage. Additionally, self-employed borrowers typically must provide a minimum of two years of federal tax returns verifying their income when applying for a mortgage.
If you have less than two years of continuous employment history it may be challenging for you to get a mortgage but lenders do have some discretion on this point. If you can effectively explain the gap in your employment or highlight the strength and stability of your current job and monthly income, a lender may be willing to provide a mortgage to a borrower with less than two years of continuous employment history.
We recommend that you prepare a detailed written explanation of any gaps or irregularities in your employment history and speak to multiple lenders about your mortgage. While one lender may reject your application due to an employment issue, another lender may focus on your current job and income rather than your employment history, and approve you for the mortgage.
Appraisal Comes Up Short
The appraisal report, ordered by the lender and provided by an independent third party called an appraiser, is a comprehensive analysis of the value of the home you are seeking to purchase. While you and the seller have agreed to a purchase price for the home you want to buy, the appraiser provides the lender with an objective opinion on the value of the house. The lender wants to make sure that that value of the house exceeds the value of the mortgage it is providing to you (so that the lender can recover its money in the unfortunate case when the borrower cannot repay his or her mortgage).
When the appraised value of the property is less than expected, this is known as the appraisal "coming up short." If the appraisal "comes up short" and shows a value for the house significantly less than the price you have agreed to pay for it, then the loan-to-value (LTV) ratio, or the ratio of the mortgage amount to the value of the property you are buying, may be pushed above the lender's maximum LTV limit, which is typically 80%, and the lender may not approve your mortgage.
There are several steps you can take if the appraisal comes up short. You can try to renegotiate the purchase price of the home, which the seller may be unwilling to do. You can reduce your loan size by increasing your down payment so that the LTV ratio is less than 80%, which you may not have the money to do. The lender may ask you to purchase private mortgage insurance (PMI) which is an additional ongoing monthly cost to you. The lender may also decide to decline the loan, in which case you are out the cost of the appraisal as well as a lot of time and effort. Finally, you can also ask the lender to review the appraisal or request an additional appraisal although there is no guarantee that the new appraisal will produce a higher estimated value for the home, or if it does, the lender may not use the higher property value for its underwriting process.
The best way to avoid having your appraisal come up short is to make sure you pay a fair price for the property and not overpay. You should work closely with your real estate agent and do your own research on property values on web sites like Zillow, Trulia and Realtor to help you determine a fair price for the house you want to buy
Issues with the Property Inspection Report
A home buyer typically orders a property inspection report after his or her offer to purchase has been accepted by the property seller. In some cases the seller provides a property inspection report to potential buyers during the home sale process but it is advisable that the property buyer orders his or her own report. The property inspection is performed by a licensed professional who identifies potential issues with the property such as termite damage, structural issues or a roof that needs repairs.
After reviewing the inspection report, the buyer and seller can negotiate who pays for any issues that need to be addressed prior to completing the sale of the property. In some cases a seller may be willing to pay for all of the required repairs while in other cases the seller may not be willing to pay for any of the required repairs. Unless the items outlined in the home inspection report are major, the buyer and seller typically come to an agreement on who pays how much to address the items and the sale process moves forward.
It is important to identify any property issues that need to be addressed at the start of the process so that they do not delay or prevent you from closing your mortgage. For example, the lender orders an appraisal to determine the value of the property and in some cases the appraiser may identify issues with the property that need to be corrected before the lender provides final mortgage approval.
Additionally, if there are multiple issues with the property it may result in a lower appraised value which can make getting a mortgage more difficult. The best approach for the borrower to take is to identify and address any significant home inspection issues early in the home purchase process so that they do not interfere with the mortgage approval process.
The Importance of Credit: http://myhome.freddiemac.com/buy/credit-importance.html