Preparing to buy a house can be a major undertaking, especially if you have never done so before. While technology has helped reduce the amount of paperwork and stress involved in getting a mortgage, it still is not exactly a quick or simple process. It can be made even more frustrating if you begin the mortgage process only to find out that most lenders do not believe you are in a good position to take on this large amount of debt. There can be a number of reasons why lenders may decline your application, that’s why it is important to sit down and determine if you are ready to buy before you begin the actual loan application process. If it looks like you’re not ready, you can create a plan to address the reasons why a lender may deny your loan application.
Look at Your Credit Score
When a lender pulls your credit report, they are going to look at both your credit score and your credit history. Your credit score is one of the key factors used to determine whether or not you are credit-worthy. It also plays a part in determining your mortgage’s interest rate as well. The higher your credit score, the more likely you will get the current prime rate because lenders will be feel more confident that you will not default on your mortgage. Those with lower credit scores are seen as more of a risk, so lenders charge a higher interest rate as a way of mitigating what they see as potential losses.
For most conventional mortgages, lenders are looking for a credit score of over 700, though generally lenders accept applications from those with scores in the high 600s. For couples or joint applicants, one applicant’s high score can sometimes help to balance out the other applicant’s lower score. For those applying for mortgages through the VA, FHA, or other lending programs, you may find that it is easier to get approved with a lower credit score.
Request a Free Credit Report
Federal law allows an individual to request a free copy of their credit report once per calendar year, plus many credit card companies and credit reporting agencies provide a limited version of this report for free. By looking at your credit report, you can learn your current debt-to-income (DTI) ratio, what accounts have reported late or show missed payments, and other important information. This is also a helpful tool in determining whether or not something has been reported incorrectly or if your identity has been stolen. Should you find any discrepancies in your credit report, it is paramount that you address these issues immediately. The sooner these discrepancies are corrected, the easier it will be to secure a mortgage.
Consider Your Current and Future Debts
If your credit score is within the desired range and your credit history is clean, the next factor to evaluate is your debt. First, look at your current DTI. Ideally, your DTI will be 36% or less. This means your total regular monthly debts are less than 36% of your monthly income. There are a few things to note when calculating your DTI. First, lenders generally look at your gross monthly income rather than your net income after taxes and other deductions. Second, DTI only looks at credit debt, such as auto loans, credit cards, student loans, and other types of tangible debt. It does not include monthly expenses such as utility bills or food costs.
While 36% is a fairly standard number for a conventional mortgage, other types of mortgages may allow for a higher DTI. It’s also important to look at both front-end and back-end DTI. Front-end DTI is the cost of your potential mortgage payment, insurance, property taxes, and any other fee (HOA, etc.) associated with buying a new home. Ideally, this DTI will be 28% or less. The back-end DTI is as described above—the ratio of all of your credit card debt and other loans to your income. Having low front-end and back-end DTI is ideal before you apply for a mortgage.
Are You Ready to Buy?
Now that you are armed with your credit score, credit history, and financial information, you can determine if you are in a position to buy a house now. If your credit score is under 650, if you have blemishes on your credit history, or if your DTI is high, you may want to put off buying property for a year or so. During that time, you can work to improve your credit score and DTI. You can also work with creditors and credit reporting companies to remove negative entries on your credit report, especially if you do not recognize the debt.
Real estate professionals may not be lenders or financial experts, but many have learned about the process and can recognize those who are in a good position to get a mortgage. If you have started looking at properties and are concerned you may not be in a position to purchase one at this time, you can discuss your budget with your agent. Often, they will be able to help you get a general idea of what you can afford before you sit down with a lender. They may also be able to suggest ways you can improve your viability for a mortgage or help you find a great finance officer to work with through their network of professionals.
If you are a part of the LGBTQ community, you may want to work with a full-time professional gay or lesbian real estate agent. These experts understand any unique needs you may have as an LGBTQ individual or couple and can help make the entire process much more enjoyable. Feel free to reach out to any of the agents here at www.GayRealEstate.com, where we have been helping the LGBTQ community with home buying and selling since 1991.