Some of the best experiences in life often have a “hassle factor.” Think about it, events like graduating from college, getting married, having a child, and starting a new job are all exciting milestones, but also come with many hassles. Perhaps that’s why we celebrate such events with much enthusiasm. We realize these accomplishments are a big deal. Buying a home and getting a loan is no different. It can be an emotional roller coaster. However, if you know the most common hiccups ahead of time, you can plan accordingly and hopefully avoid some of these issues.
To qualify for a loan, the individuals on the loan application will need to show sufficient income. Lenders typically don’t want you to have to spend more than 33 percent of your gross income per month on housing.
Too Much Debt
Having too much debt is a common issue exposed during the underwriting process. Lenders evaluate your income in relation to your debt. If you have too many bills compared to your income then your debt to income (DTI) ratio will be too high.
Some mortgage lenders require the borrower to have additional funds in the bank, above and beyond the money needed to close (down payment and fees). These funds are known as cash reserves, and the requirements vary from one lender to the next.
Poor Credit History
Have you often been late on paying your credit card or cell phone bill? The underwriter will review your credit report history to see how well you’ve repaid previous debt. If the underwriter finds too many late payments, it could cause your application to be denied, usually because your credit score will be lower than required.
Unstable Employment History
Lenders vary in their requirements for employment history. The general rule of thumb though, is that the borrower should have at least two consecutive years of steady employment to qualify for a mortgage. Keep in mind that there are exceptions, so don’t count yourself out without first consulting with your favorite mortgage professional.
The money set aside for your down payment and closing must be verified. You need to be able to show that it came from a legal and verifiable source. The underwriter might also require the funds be “seasoned,” which means the money has been in the bank for the required amount of time.
Before your application is approved the underwriter will need to verify that the home you’re purchasing is worth the amount you are paying for it. That is why you will have to hire a licensed appraiser to determine the current fair market value of the home. In the event of a low appraisal, the seller can reduce the sales price, or you can choose to pay the difference out of pocket.
This issue applies to homeowners who are attempting to refinance an existing mortgage. It boils down to collateral. Unfortunately, many people think that their home is worth more than the fair market value.
Understanding common problems in the home loan process will help you anticipate the issues and prepare the correct documentation needed. It may be a bit of a hassle, but when you’re handed the keys to your new home, you’ll forget all about it.
Note: Opinions expressed are solely my own and do not express the views of my employer