Unfortunately, mortgage lenders aren’t just handing out loans like free toasters at the bank. So before the lender forks over a big bundle of cash that you need to get a home, they will dive into your credit history like crazy. They are trying to determine whether you are a risk.
It can definitely be a stressful process for you, but before you freak out, be aware that not all financial misdeeds are created equal. Some are mere blips, while others are more of a nuclear fallout situation. Here is a rundown of the top mortgage approval land mines, ranked from least to most serious.
Student Debt- Risk Level 1/10
Thankfully student debt in itself is no big deal. The problem is if lenders see if you are struggling to pay it off. So keep chipping away at it to ensure college tuition won’t derail your homeowner dreams
Employment Changes- Risk Level 2/10
Lenders definitely like to see worker bees with a solid record of gainful employment. If you’ve recently changed jobs, that’s not necessarily bad, because people job-hop all the time. As long as it’s roughly in the same line of work and compensation level, lenders won’t blink.
That said, employment status changes can give them pause. If you had a full-time staff job that paid W-2 income and became a 1099-compensation “consultant,” you become technically self-employed. As such, lenders will typically want to see two solid years of income history before they’re comfortable loaning you money.
If you are newly self-employed, you might be able to secure mortgage financing with the help of a non-occupying co-borrower, but otherwise, you might have to wait at least a year until you can document income on your tax return.
A Mediocre Credit Score- Risk Level 3/10
That all-important numerical summary of how well you’ve paid off the past debts does come into play here. For better or worse, it is a tool that helps lenders quickly judge your financial worthiness. Scores can run the gamut from stellar to average to subpar, so your riskiness in the eye of the money guys depends on where you fall on that spectrum.
Typically a “good” score is considered to be 700 and up which should qualify you for the best interest rates and other perks. On the lower end, the minimum credit score you will usually need to be considered for a mortgage is 660. The lower the score, the higher the interest rates you will be stuck with. If you have a score in the low 600s or below, get to work on improving it. With some diligence and patience, there are plenty of ways to boost your credit score.
Inaccurate Disclosure Income- Risk Level 4/10
Of course, you know how much money you make, but if that number is not so clear-cut from a lender’s perspective, it can land you in trouble. In many cases, borrowers state their income inaccurately because they don’t actually know how much money they make. The may think they do, but don’t realize that for mortgage purposes, bonus, overtime, and commission are all calculated separately from base employment income, which is what lenders really want. For self-employed borrowers, calculation of base income can be even more complex.
So be sure to accurately portray your income and separate out your bonuses, overtime, and other details rather than lumping them all together hoping for a higher total.
Undeclared “Help” With Your Down Payment- Risk Level 5/10
Have a great uncle who’s loaded and would like to pitch in to help defray your home buying costs? Congrats! Just make sure to declare this money as a gift, or it could hurt more than help.
There are rules for where down payment money can come from, so if there is a large unidentified deposit lurking in one of your accounts, rest assured lenders will want to know how it got there. As such, you will need a letter from the donor delineating the amount, date of transfer, and assurance that these funds won’t require repayment.
Whatever you do, don’t lie or try to cover it up!
Bankruptcy- Risk Level 7/10
Blame it on Monopoly but bankruptcy is scary. It basically means you’ve given up and declared that you were unable to pay off your debts. In real life, rather than a board game, bankruptcy can be a godsend if you are really in over your head because it allows you to start fresh. However, it will make lenders leery but not forever.
Once a bankruptcy is more than two years in the past, you’re back in the home buying game. Just be sure to re-establish a credit history and keep it sparkling clean with on-time payments.
Foreclosure- Risk Level 8/10
Bankruptcy is bad, but a foreclosure is worse, at least in the eyes of a lender. It means that you were unable to pay your mortgage once, it doesn’t bode will for a new lender getting its money back either. However, as with bankruptcy, time heals all wounds. Lenders will typically be open to reviewing your application arounf 7 years after foreclosure or 4 years after a short sale.
