Finding the right home loan is an important step on your journey to home ownership, as it helps you to clearly understand your finances and what you can afford, which can help streamline your home search. But what if you weren’t able to get pre-qualified? There are a number of risk factors lenders take into consideration when considering you as a viable loan candidate, and it can help to know what they look for – and how you can improve them so the next time you go for pre-qualification you walk away with a letter you can be proud to show potential realtors and sellers.
Your Credit Score
Most lenders like to see credit scores in the "Excellent" or "Good" ranges. The higher the credit score, the less of a risk someone will be in their ability to pay back the loan. If you have a low credit score, this was likely one of the deciding factors in determining if there are home loans available for you.
To fix this before your next application, monitor your credit often. Be proactive about investigating charges of which you are unaware and stay on top of any activity on your credit report every 12 months from each of the major credit reporting agencies – Equifax, Experian and TransUnion – through AnnualCreditReport.com. This is the only site that is government authorized to provide you with free copies of your credit report.
Your Debt-to-Income Ratio
This is the percentage of monthly income that you spend on debt payments, including student loans, auto loans, minimum credit card payments and child support. Your ability to manage these accounts is an indicator of how well you can make mortgage payments.
If you have too many revolving accounts, it’s time to get your debts in order. Exercise responsible spending and avoid running up large balances on credit cards. Don't open new accounts often, and only do so when you need them. Set a weekly or monthly budget to learn how to spend within your means, lower your debt and raise your credit score.
Your Payment History
Lenders like to see how well someone pays back their debts and how often they’ve missed payments, as it’s seen as a reflection of how responsible someone can be when making monthly mortgage payments.
Having too many late payments, or too many accounts in collections, can act as a black mark against you. Make sure to set reminders on your calendar to get organized and follow up on payments due so you don't miss any. Always make it a priority to pay your bills on time – and if finances are an issue, see what kind of extra work you can pick up to get you ahead of the game.
Your Income and Assets
Lenders will take a holistic look at all assets, including stocks and bonds, to get a full picture of your financial health. Employment history and income is evaluated to understand how well someone can earn money to pay back their loan.
Next time you're looking for a home loan, know all of your assets and disclose all of your sources of income and revenue. Make sure you keep your employment history and references handy.
Mortgages are a big financial responsibility. If you didn’t find the right home loan, remember that it’s just a temporary setback on your road to home ownership. Take the time out to get your financial house in order, then re-apply. You’ll be glad you took the time out to better prepare you for your potential new mortgage.
If you have any questions about finding the right home loan, contact one of our Home Specialists. They’re happy to help.