You’ve saved for a down payment, you’ve checked your credit score, you’ve limited your debt and you’re ready to mortgage your dream home. But how thorough is your understanding of what lenders are looking for?
In a 2018 analysis of more than 10 million mortgage applications, Lending Tree found that almost 1 in 10 loan applications are denied by the lender. Before you even fill out the application, make sure you’re prepared. Here are five surprising things that might stop you from getting a mortgage.
Your Credit Score Isn’t What You Think It Is
According to a study commissioned by NerdWallet, fewer than 10 percent of Americans know that they have more than one credit score — and they rely on free credit scoring websites rather than going to the source. Most lenders use FICO scoring, so to find out your credit score, go to one of the three FICO-approved credit bureaus (Equifax, Experian and TransUnion). For a free FICO score, check with your bank or credit card issuers. They typically offer free credit reporting.
Recent Changes to Your Job or Income
While it is possible to get a home loan after a recent job change, it can be tricky — especially if your income structure changes significantly, such as moving from a standard salaried role to one that offers a lower salary with a commission and bonus structure. When evaluating your credit application, a lender will calculate your average salary over the past 24 months. If you’re new to your commission-based role, then your income history might not yet be an accurate reflection of what you expect to make.
Too Much Debt
It is a common misconception that carrying a balance on your credit cards can give your credit a boost. This is not only untrue, but it can actually hurt your credit score. Carrying balances that are too high could leave you with a high credit utilization rate. If the amount of debt you have is a significant percentage of your credit limit, it could severely impact your credit score — even if your debt-to-income ratio is good.
Your loan pre-approval is based on a snapshot of your credit at the time of your application. If you take on additional debt between the time you apply for pre-approval and the time you apply for the loan, it could change the status of your pre-approval. Avoid buying a new car, taking out any sort of loan or racking up significant credit card debt while you’re in the process of buying a home.
Issues With the Home Loan Appraisal
Lending Tree’s 2018 analysis also reported that 17 percent of home loan rejections are due to insufficient collateral. Before they issue a home loan, most lenders require a value appraisal to make sure that the cost of the home is not more than the home’s value. After all, you wouldn’t want to pay more for a house than it’s worth — and neither does the lender! They’ll consider several factors, including the value of the property and the condition of the home. Sometimes the home itself isn’t the problem, but market conditions could influence the value. For example, multiple competing offers could push the price of the home higher than its value, or too many foreclosures in the neighborhood could drive its value down.
An experienced real estate agent should be to help you through every step of the home-buying process and walk you through what to expect. But it’s important to do the research yourself so that you can be as prepared as possible when it’s time to apply. If your credit is keeping you from homeownership, talk to a nonprofit housing counselor and they can help you get homebuyer ready!
About the author: Serena Miller is an Atlanta real estate agent for Owners.com, where the process of buying and selling your home is made simple. Serena enjoys walking homeowners through specific things they can do to increase their chances for loan approval. When she’s not working tirelessly for her clients, Serena tries new restaurants and travels with her two adult daughters. She also takes care of her home by tackling home improvement projects like tiling and painting.