I normally talk about how to get approved for mortgage financing so I thought I would change it up this week. Below you will find a list of 7 instances that could result in a decline, rather than the mortgage approval you were hoping for. Individually, not every point on the list guarantees a negative response, however fitting into a few of the categories could spell trouble when it comes time to set up the mortgage in the home buying process.
1) Discharged from bankruptcy with no new re-established credit.
Everyone knows bad things happen to good people, however, in the case of a bankruptcy, it’s very important to obtain brand new credit after you have been discharged from bankruptcy. The most common new accounts I have seen clients initially apply for are secured credit cards. Ideally, a $2500 limit is good though you may have to start with a lower limit. I suggest using it once or twice a month for small purchases and pay off at the end of each month. Once you have demonstrated a good payment history on that 1st card, see what other accounts you would be eligible for as lenders look for more than one account under re-established credit. Also be aware the lenders all seem to have different rules on when they will actually lend to someone who has been in bankruptcy and what the minimum down payment required will be.
2) Do not have sufficient downpayment funds on hand
The minimum downpayment required is 5% of the purchase price amount. In addition to the 5% down, you also have to demonstrate to the lender that you have another say 1.5% of the purchase price available to cover the closing costs such as legal fees, property tax adjustments as well as other miscellaneous costs. If cash is really tight, you may have to look at property with a lower purchase price in order to meet these requirements or see if there is any family support available. Another option may be to speak with a mortgage professional who has access to a number of lender products to determine if you qualify to “borrow” funds in order to meet the additional cash requirements over and above the mortgage loan
3) Carrying too much debt
Your existing debts will affect how much financing you can qualify for which means car payments, credit card balances owing, student loans and utilized lines of credit can reduce the maximum mortgage amount you can be approved for. Further to that, some lenders use different calculations on what minimum payment amount they will use in debt servicing regardless of what the actual minimum payment required is. If you do have too much debt in relation to your income, you may want to look at reducing your debt level as much as you can before you apply for a mortgage or look at having a close relative co-sign on the mortgage with you for a period of time while you reduce debts . Having said that, anyone willing to co-sign needs to be aware of what the implications are for them going forward.
4) Not enough credit reporting
To qualify for best interest rates and with the minimum required downpayment, most lenders would be looking for a good credit score with at least two years of credit reporting on two separate debts. If you don’t have that, you may still be considered for approval if you can bring on a strong co-signer that has good credit and income. The alternative to bringing on a co-signer is working with a lender who does not care as much about credit, but puts more weight on the strength of the property and the rest of the borrower application though rates and down payment required may be higher.
5) Can’t prove income
Depending on your employment type, proving your income to the lenders satisfaction is necessary for an approval. One lender’s guidelines can vary from another’s. If you are concerned, do work with a mortgage professional who has access to multiple lenders in order to maximize your chances of finding a lender whose conditions fit with what you are able to provide as confirmation of income. This goes for the recently self-employed and those who collect tips too as there are a few niche products available these days for those types of income earners. Don’t be surprised if you’re asked for a larger downpayment or charged a higher interest rate in exchange for more liberal income requirements.
6) Don’t pay your bills on time
When a lender looks at your credit report, they’re looking for how you’ve repaid your debts in the past. If it shows you don’t pay your bills on time, the lender may be hesitant in allowing you to borrower from them as there could be a chance you won’t pay them on time either. Never too late to work really hard at making all payments on time as over time the “good” will eventually cancel out the “bad” payment history if you can show you’ve changed your habits and now pay on time, your lender will be more likely to extend you financing.
There is no point in stretching the truth on your mortgage application. Any potential mortgage lender considering your application will issue an approval based on you satisfying the requirements they’ve set out as conditions of that approval. The lender can rescind your financing if they find out any of the supporting documents provided do not match the information provided by you on your initial application. Save yourself the stress by being honest and upfront about your financial profile and if you don’t know exact figures or numbers, get them at your earliest convenience to avoid any disappointments
Don’t be alarmed if you see yourself in a few of the above points. Find out where your approval chances sit right now by having a preliminary chat with your favorite mortgage professional. Get a pre-approval and shop with confidence, or get an action plan to fix what you have to in order to eventually qualify for a mortgage approval.