Although lenders have eased up a little bit on credit standards, it is still pretty tough to get a mortgage for many people.
One of the main reasons it's so tough is that simply having a good credit score isn't enough. In fact, the average credit score of a rejected conventional purchase mortgage applicant is currently 723, well within the range of "good" credit.
Here are five red flags that could cause an otherwise solid mortgage application to be denied.
Have you changed jobs recently?
Even if your income is sufficient, most lenders want to see a two-year stable employment history.
Now, this doesn't necessarily mean you need to be in the same job, but any gaps in employment are a no-no. For example, if you got laid off from one job and it took you three months to find another, it can be an issue.
Even if there were no gaps in employment, but you changed career fields, it can be a problem. For example, if you were working as a teacher one year and an accountant the next, it's not really a "stable" history in the eyes of many lenders.
Problems with your employment history won't necessarily be a reason for rejection all by themselves, but they are likely to be closely examined. And for you younger homebuyers -- if your employment history doesn't cover a full two years because you were in college, that is usually OK.
Asking for too much money
Depending on the amount of money you try to borrow, your loan will be classified as either "conforming" or "jumbo." Conforming loans are those eligible to be sold to Fannie Mae or Freddie Mac, so lenders are willing to take a little more risk on these.
On the other hand, jumbo loans are mortgages with loan amounts above $417,000 in most of the country, but this is higher in certain high-cost-of-living parts of the United States. Because lenders can't sell jumbo loans to Fannie and Freddie, qualification standards tend to be a little stricter.
So, if you are a borderline candidate by conventional standards, you may run into problems if you try to qualify for a large mortgage amount.
Lots of other debt
When determining whether or not you qualify for a mortgage, a lender will look at two debt-to-income ratios.
The first, called the "front-end ratio," is just the ratio of your mortgage payment to your gross income. So, if your mortgage payment is $1,000 and you make $5,000 per month, this ratio will be 20%. Lenders typically use a 28% maximum for this ratio, and it is pretty straightforward to determine whether your income is sufficient.
The "back-end ratio" takes your total debt (including your expected mortgage payment) relative to your income. For example, if your mortgage will be $1,000 per month and you have $1,000 in other debts, and earn $5,000 per month, this ratio is 40%.
A typical maximum back-end ratio is 36%, but may be higher or lower depending on your lender and where you live.
If you happen to have lots of student loans, high credit card balances, or lots of other debts, you may want to double-check this ratio before you apply.
Can't document your income
This is especially a problem for self-employed individuals. You may make more than enough money to justify your mortgage, but unless you can provide documentation the lender won't care about it.
Tax returns might not be good enough. After all, anyone can claim to make a certain amount of money. Sometimes, lenders will ask for profit/loss statements and other documentation that you actually make what you say you do.
Not enough money down
Now, I'm well aware that loan programs exist that allow for low down payments, such as VA and USDA loans, which can actually provide 100% financing. There are also FHA mortgages, which allow for as little as 3.5% down. However, FHA loans have gotten very expensive and should be avoided if possible.
There are some conventional loan programs that allow for less than the typical 20% down payment, but you should know that it becomes an uphill battle as the down payment amount falls. With 20% down, for example, some lenders will give you a conventional loan with a credit score as low as 620, provided your income and debts are in order. If you are trying to put 10% down or less, the credit and other documentation requirements get much stricter.
Know your weaknesses before you apply
The point here is not to discourage you from applying for a mortgage if one of these issues applies to you. In fact, any of these issues can usually be overcome, even if it takes a little while.
Rather, the purpose is to make you aware of your "shortcomings," to let you address them before you start filling out applications. For example, if your credit card balances make your debt-to-income ratio a little high, you can focus on paying them down to the appropriate amount in the coming weeks and months.
The better informed you are, the smoother the process will be for you. And the more likely it will be that you get approved and into the house you want.
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