While getting a mortgage might be more affordable now than any other time in history, you may still find it challenging to access one. Many mortgage lenders have heightened their standards due to the unprecedented uncertainty caused by the covid 19 pandemic, although things are gradually going back to normal.
If you consider taking a mortgage for your first-time home purchase, you need to assess your financial situation to know where you stand. You should also be aware of these red flags that may make it challenging to get a mortgage.
Poor Credit Score
Lenders need your credit score to assess your eligibility for a mortgage and know if they can trust you to repay it. Your credit score measures your history in paying debts, and your credit report shows a record of any defaults, missed payments, foreclosures, or a recent bankruptcy. If you don’t pay your loans on time, the lender will be concerned, and they may deny you a loan.
Some government loans, such as FHA loans, make it possible to access a loan with a credit score as low as 500 plus a 10% down payment. But you will find it hard to get a mortgage from a conventional lender without a credit score of at least 620. If you are approved, you may have to pay high interest.
As mentioned above, lenders want to ascertain that you have a stable income before lending you. If you are making very little and your debt to income ratio is high, you may have to kiss the mortgage goodbye.
Specifically, mortgage lenders assess your debt to income ratio to know whether you can repay the loan comfortably. Click here to learn more about how lenders evaluate your debt-to-income ratio when seeking a mortgage.
One of the most important things your lender will want to know is how you will pay your loan, and they do that by assessing your employment or earnings history. Many mortgage lenders will want proof that you have worked for the same employer for some years and that your income has been constant or gone up a bit over time.
If you have changed employers a lot in the last months, your income is all over the place, and they may not be in a position to lend you. Mortgage lenders also ask for tax returns to evaluate whether your income will likely remain stable in the next few years. If you are employed, they may ask for proof of employment.
Little Down Payment
You must have some financial backup in the game when borrowing a loan to finance a home purchase. You should have some money to put down on the line, which is determined by the amount you borrow relative to the property’s market value. The down payment gives the lender plenty of equity in the home, so they know they can sell it to cover the costs if you default.
Despite these challenges, you may be able to set yourself up for the best outcome with the right mortgage expert by your side.