You don’t need a perfect mortgage application to secure a mortgage, but there are some common mortgage roadblocks that may cause a delay. Some issues that arise can prevent you from securing a mortgage altogether. We discuss these issues and help you see how you can get around them.
Working for Yourself is a Mortgage Roadblock
You finally don’t have to answer to a boss. You are in charge of everything. You might love it, but your lender thinks otherwise. Working for someone else provides lenders with a sense of security. Lenders want to see consistency. This might not be something you can offer when you work for yourself.
Here’s how to get around it.
Provide at least 2 years’ worth of tax returns. It’s even better if your income increases during that time. Want even more help? Don’t write off every expense. If you can plan ahead, knowing you will buy a home in 2 years, limit your write-offs. This helps increase your income and your chances of approval.
The more experience you have in the industry, the better too. In other words, don’t go from working as an accountant to opening a florist. While you can, lenders might not see this as a good move. They want experience in the industry. This helps give them peace of mind of your income’s consistency.
Bad Past Credit Decisions Prevent Mortgage Approvals
Your past may haunt you longer than you expected. That one bill you decided didn’t matter 3 years ago may suddenly prevent you from getting a mortgage. There’s things you can do about it. Just don’t wait until the last minute.
Here are a few simple tips.
- Pull your credit and see what you need to fix
- Bring all late accounts current
- Start paying all bills on time
- Pay off any revolving debts that you can
- Don’t close any accounts, older accounts help keep your credit score up
- Don’t apply for any new credit in the months leading up to your mortgage application
These things take time. The earlier you start, the more your score may increase.
High Debt Ratios are Mortgage Roadblocks
Each loan program has its own maximum debt ratio. Know the required limits for your program before applying for the loan. The most common loans have the following limits:
- FHA – 31/43
- Conventional 28/36
- VA – Maximum total debt ratio of 43%
- USDA – 29/41
If you can’t meet the requirements for your loan program, try the following:
- Increase your down payment; the more you put down the lower your mortgage payment
- Pay off any debts you can eliminate
- Try to find an avenue for secondary income
If you can’t change any of the above, consider improving your compensating factors. For example, if you have a very high credit score, a lender may excuse a slightly higher debt ratio. Other compensating factors include stable employment, potential for a raise (verified by your employer), or a large down payment.
Having Inadequate Assets can Prevent Your Mortgage Approval
Speaking of down payments, the more you put down the better. This isn’t always possible, though. Without a large enough down payment, you might be without a mortgage. Before you give up, try these tips:
- Trim your budget of things you don’t need to spend. Look long and hard at things like coffee shop trips, spending sprees, and gym memberships. It also helps to try cutting down on eating out, cable bills, and even grocery bills.
- Create a savings plan and stick to it. Making your savings automatic helps limit your spending. Designated a certain percentage of your paycheck every week to your savings and have it automatically deposited.
- Ask family for a down payment gift or apply for a down payment assistance program.
Lower Than Expected Appraisals May Prevent Sales
Sometimes sellers ask a higher price than their home is worth. You don’t find out until the appraisal is complete, though. At this point, you’ve already signed a contract. You may be able to get out of the contract if you had an appraisal contingency. If you didn’t or even if you did and you want the house, you can work around it with the following:
- Put down a higher down payment. Your lender will base your loan on the appraised value. If the value comes in short compared to the price you agreed to pay, you’ll have to pay the difference.
- Negotiate a different price with the seller. Hopefully, the seller just didn’t know the true value of his home. While he’ll want to make a profit, he’ll likely recognize that no lender will provide financing for an inflated amount. If you want the home, you may be able to get the seller to settle for a lower price.
- Some lenders may allow you to pay for a 2nd appraisal or ask for an appraisal review. You might find that the appraiser used incorrect comparable properties or overlooked upgrades on the home. Of course, you’ll pay for the appraisal, which means more money out of your pocket.
These common mortgage roadblocks don’t have to prevent you from securing a mortgage. They each have a workaround. You can also shop around with different lenders. No two lenders will have the same exact requirements. Shopping around not only lets you find the lender with the best rates/fees, but also the one that will approve your loan.
Pay close attention to what each lender offers. Don’t settle for the first offer because you think it’s all you will get. Do you best to avoid these common roadblocks and see what lenders offer you. Oftentimes, borrowers are pleasantly surprised at the offers that come their way.