Why Can’t I Get a Mortgage?
As you begin the process of looking for and buying a home, one of the most important criteria is knowing what you can afford. That means you need to apply and be approved for a mortgage. A mortgage is a loan from a bank or mortgage lender that helps you finance the purchase of a home. With the house or property acting as collateral, the lender loans you a sum of money, known as the principal, that you then pay back on a monthly basis along with interest, taxes, and insurance. And unless you have a reserve of cash laying around to pay for the home outright, your ability to purchase a home hinges on being approved for a mortgage.
It's important to know upfront how much you can borrow to avoid wasting time looking at homes that may be out of your price range. It can lead to a lot of disappointment when you find the home of your dreams only to find out you don’t qualify for a sufficient mortgage. Unfortunately, many first-time homebuyers make this mistake because they don’t know what goes into a lender’s decision.
Whether you’re just starting the home buying process or have been looking for months and were recently turned down for a mortgage, don’t fret! The mortgage lending professionals at Great Hills Lending Group may be able to help you. By increasing your knowledge of the process, you can improve your chance of getting a mortgage in the future. Below are a few reasons you might be turned down for a mortgage.
Your Credit Score Isn’t Great
One of the most significant factors in getting approved for a mortgage is the buyer’s credit score. Not only does your credit score determine whether you can get a mortgage, but also how high the interest rate will be, how much down payment is required, and the amount of mortgage insurance required. How high this score needs to be will vary from lender to lender, but there are a few universal truths to keep in mind.
A common misconception is that lenders will only check one credit score. The truth is, mortgage lenders pull your credit score from all three credit bureaus and use the middle one to determine whether or not you can get a mortgage. Your credit score can also vary over the course of the month depending on a number of factors such as your credit card balance. To be approved for a mortgage, you typically need at least a 620 credit score across the board and a 20 percent down payment. Be aware of your credit score before applying for a mortgage, and if it’s low, take steps to improve it.
Unless you’ve been gifted a large sum of money through inheritance or you won the lottery, you need a steady income to pay your monthly mortgage payment. Lenders like to see a stable employment history without long gaps between jobs, so they know you will have the money each month to make your payments. Like credit scores, employment history requirements vary from lender to lender, but generally, it’s good to have a consistent work history. And while many people believe you have to have a two-year employment history to apply for a mortgage, this isn’t always the case. Some red flags for lenders include a six-month gap in employment, a change in career fields, and a wide range of weekly hours worked.
If you do have a gap in employment, it isn’t the end of the world, especially if you have a good reason for the inconsistency. This includes unforeseen circumstances such as family-related emergencies, maternity leave, or an illness that kept you from working. If you are currently without work, focus on finding a job and staying at it for at least six months before you begin thinking about applying for a mortgage.
You Have Too Much Debt
While debt is often a helpful means of advancing your life, too much bad debt can negatively impact your chances of getting a mortgage. Lenders call this the debt-to-income ratio, and each mortgage has different standards and guidelines for the amount of debt the borrower can carry. Fortunately, you can be proactive about this by being aware of how much debt you have and managing it properly. Because a mortgage is a loan against your income, a good rule of thumb is that debt payments should be about five percent of your monthly income. Anything more can negatively impact how much you can borrow for a mortgage.
You Don’t Have Enough for a Down Payment
The down payment is a lump sum that you pay when you first buy your home. The amount you need will vary from lender to lender and also depends on your credit score. While it’s ideal to make a 20 percent down payment, some loans only require 3.5 percent. However, be aware that along with the down payment, you will also need to pay closing costs, which are typically around three percent of the total cost for a home under $500,000. If you don’t have the money for a down payment, dedicate the next year to cutting costs and saving where you can.
Call Domain Realty Today
At Domain Realty, we are passionate about helping people find the home of their dreams. Along with our partners at Great Hills Lending Group, we will help you through every step of the purchasing process and answer any questions you have about obtaining a mortgage. To speak with an Austin real estate professional, call us today at (512) 872-4211 and get started.