Whether you’re looking to purchase a home or simply refinance your current one, today’s incredibly low interest rates can make this a great time to take on the challenge. But as you know, home prices are also up, and the overall economy feels a bit shaky. Lenders will scrutinize every aspect of your mortgage application, and the following four factors can make or break your ability to qualify.
Your credit score. This one won’t surprise you. A low credit score can prevent you from getting a mortgage at all. Or if you have an “okay” score, you might be subject to mortgage insurance or higher interest rates – or both.
Your employment history. Lenders prefer candidates with a solid work and earnings history. It’s no big surprise that they feel this way; applicants with a consistent employment history and income are more likely to keep their debts covered. Those with spotty work records or inconsistent income are seen as a higher risk for default on debts such as a mortgage payment.
Your debt-to-income ratio. Lenders compare the amount of debt you’re carrying to the amount of income you earn. They prefer candidates whose housing expenses (house payment, homeowners’ insurance, and property taxes) fall at or below 28 percent. Total debts should fall at or below 36 percent of your income, in most cases.
If you have a less than favorable debt to income ratio, you might not be barred from a mortgage entirely. But you might be limited to FHA or VA mortgages.
Recent debts. If you’ve recently opened a large line of credit, this could be seen as a red flag in an underwriter’s eyes. If you’re in the process of buying or refinancing a home, think twice before opening new credit cards or taking other steps that could signal financial instability.
And of course, you might be wondering how a home purchase or refinance fits into your overall financial plan. Give us a call to schedule a consultation, and we’ll help you analyze your situation.