You have decided you want to buy a home and you are all ready to start shopping, but that thing called a “mortgage” is getting in the way. Maybe you tried to get pre-qualified and overheard someone refer to you as a risky buyer. Perhaps you have already applied and got turned down. Whatever the case, if you are considered a risky buyer, you should address a few things first.
How low is low? You may have a 550 credit score and think that since you are closer to the high end than the low end, you have to be a decent borrower. Unfortunately, that’s not quite how it works. A score of at least 620 is what you usually need if you don’t want lenders mentally writing “risky borrower” across your face.
There is a common misconception that you can’t get approved for a mortgage if you are self-employed. This is not true. You simply need to be able to prove your income. Tax returns, bank statements and any accounting records you keep can do this.
If you just relocated to a new area for a job, but you were with your previous employer for several years, lenders likely will not even blink about the short time on the job. They frown on someone who “job hops” every few months. They want to see stability.
A lender is not going to look too favorably at your mortgage application if they see you have major responsibilities being completely ignored; bills such as federal student loans, child support and tax liens are especially important. If you have any of these types of blemishes on your credit, they should be addressed before you even apply. They don’t have to be paid off, but they should show a history of payments being made on time.
Debt-to-income holds nearly as much weight as credit with most lenders. If you have two car payments and a handful of maxed out credit cards on your credit report it’s going to look like your bills are eating a huge percentage of your income. This is true even if one of the cars belongs to your teenager who makes all the payments.
There are major red flags that lenders look for when deciding whether to approve a loan or not. Of course your credit must meet specific guidelines but your debt-to-income ratio also needs to make sense for the lender. Before applying for your mortgage, make sure you get your paperwork in order and fix all you can with your credit.