You’ve found the home of your dreams and believe you can swing the payments to make that home your reality. What’s the problem? You’re having trouble getting the loan approval you need to facilitate your dream home purchase. Unfortunately, you’re not alone among the majority of borrowers.
Understanding why banks are reluctant to lend you money for your dream home is the key to avoiding the same fate in your future. The information below will help you determine where your loan trouble lies so you can act now to prevent that from being your fate in the future.
Low Credit Score
We all know that you are so much more than just your credit score. Unfortunately, that is what lenders have to go by. Credit scores have been used for decades to determine key things, such as:
- How likely you are to make timely payments.
- The amount of debt you currently carry.
- Debt-to-income ratios.
- Credit utilization rates (the amount of credit you have available to you vs. the amount of credit you’re currently using – lenders prefer this to be below 30 percent).
- Age of credit accounts.
Low credit scores happen if you’ve missed payments in the past or made financial missteps along the way. You can repair a damaged credit score. It takes time and hard work to undo a damaged credit history.
If your credit score is below 600, you may have quite a bit of work ahead of you in order to get through the loan approval process for most mortgage lenders. Taking those steps today can ease your way through the loan approval process the next time you’re ready to buy your dream home.
Most dream homes go hand in hand with dream home prices. Unfortunately, this can be the heart and soul of your loan trouble if you have a lower income. Lenders will only loan home buyers an amount they believe borrowers can reasonably afford to repay.
You have two options to consider here. Either work to improve your income, even if this means taking on a second job or adjust your expectations to a home that requires less income and lower monthly payments.
Another thing lenders look at is the regularity of your income. The average mortgage loan is for 30 years. While there are some loans for 10, 15, or even 20 years; most people choose a 30-year mortgage which is a significant investment for your bank over an extended term.
Lenders need assurances that you will continue earning a sufficient amount each month to repay your mortgage loan. A history of seasonal work or irregular employment can hurt your odds of getting the loan approval you seek.
Consider steady employment for one year or longer before reapplying for a mortgage loan to show lenders that you can remain employed for an extended time and that you have the ability to pay your mortgage over time.
Too Much Debt
Just as your debt can have a negative effect on your credit score; it can also be cause for concern to mortgage lenders. If you’re carrying more debt than your income can bear (debt-to-income ratio), then lenders will be reluctant to issue you a loan approval for your dream home.
Your best bet in this situation is to make steady strides to pay off credit card debts, auto loans, student loans, etc. so that your debt-to-income ratio improves substantially. Then consider applying for new loans in the future when your financial situation is more attractive to lenders.
Excessive Recent Credit Applications
If you’ve made a rash of applications for credit cards, auto loans, store accounts, and other credit accounts out of the blue, mortgage lenders may view this as a significant red flag. They fear that you may be getting in over your head. Instead, allow six months to go by with no new credit applications before applying for a home loan.
What This Means
While it might seem like too much to overcome, these problems that may hinder your loan approval efforts are not insurmountable. In fact, the steps mentioned above to help you improve your credit score, increase your income, reduce your debt, etc. can help you get through the loan approval process with flying colors. Contact Mid America Mortgage today to see how we can help you get to the bottom of your loan trouble so you can buy your dream home today!