Unless you’re a very unusual person you don’t feel good about borrowing money. You might feel a little guilty that you need to borrow money. Some people even feel a sense of shame that they had mucked up their finances to the point where they needed to borrow money to bail them out of the fix they had created. On the other hand, there are times when you can borrow money guilt free. The only way for 99% of us to buy a home is to get a mortgage, which is borrowing money but there’s nothing bad or wrong about that. Borrowing money to finance a car can fall into that same category. In fact, some experts feel that borrowing money to buy a house or car can be considered “good debt.” Another type of good debt is student loans. The reason why a mortgage or a student loan can be considered as good debt is because they appreciate in value over the years so can be considered as an investment.
So you want to buy a house?
If you’re about to buy a house (some of that good debt) it’s important for you to know your financial situation and how potential lenders would view you. What you don’t want is to be seen as a high-risk borrower. The reason for this is simple. If lenders see you as high risk you could end up spending your life as a renter. This means you would need to take steps to get rid of any red flags that could cause lenders to consider you to be a risky borrower.
An uphill battle
There are four possible scenarios that would classify you as a risky borrower. If one or more of them apply to your situation you may have some work cut out for you before you can get approved for a mortgage. People that have successfully gotten mortgages will tell you that getting one can be a long, complicated process. If you throw a heavy debt burden into this mix then the path to becoming a homeowner can be an uphill battle.
Know the rules
Most mortgage brokers look at three things in determining mortgage loan eligibility. They are your credit, your income and the house itself. As you might guess your credit must meet certain minimum guidelines. In addition, your income must be enough to repay the mortgage, and your dream home must appraise for the amount you can borrow.
One of the first things a potential lender will do to determine your ability to make payments on a mortgage is checking your credit score and review your credit reports. This will tell them how sensibly you’ve handled credit in the past.
If you haven’t seen your credit reports recently you can get yours free once a year from the three credit reporting bureaus (TransUnion, Experian and Equifax) or on the site www.annualcreditreport.com. You may already be getting your credit score free as many of the credit card issuers now automatically include credit scores on their monthly statements. If not, you can get yours free from one of the credit reporting bureaus or on sites such as CreditKarma and CreditSesame. Spoiler alert – if you find your score is below 620 you will have a very difficult time getting a mortgage.
Your employment status
Mortgage companies look most favorably on people who work a minimum of 40 hours per week in a steady job. If you are only working part-time or don’t have at least two years of tax returns to verify your self-employment income then getting a mortgage could be much trickier. If you are self-employed, you might have a mortgage pro review your tax returns to determine how much of a home you could afford before you actually apply for a mortgage.
Are you shirking any financial responsibilities?
Income and credit scores might be very important but there are other things that are even more critical. If you were not taking care of financial responsibilities such as your child support payments, unpaid tax liens or delinquent federal student loans this would definitely have an adverse affect on your ability to get a mortgage. In fact, if your reports show serious delinquencies the mortgage underwriter will simply deny you a loan in most cases. If you have some of these bad items on your credit reports you should bring them current or re-establish a payment history before going for a mortgage.
The down payment
Mortgage lenders want you to be financially invested in that new home from the very beginning. If you don’t have a down payment there are a lot of things you will need to do to demonstrate your financial worthiness and you’ll probably be required to get private mortgage insurance. On the plus side, some mortgage lenders will help you find down payment assistance to bridge the gap.
What you could do to improve the odds
If you want to improve your chances of getting a mortgage there are some things you could do. At the top of this list is getting your credit report followed by paying down debt and bringing all your accounts into good standing. You’ll need to look for ways to get money for a down payment or find homes that allow 100% financing.
Last but not least, you should avoid big purchases such as a car prior to or during the mortgage loan application process. One mortgage lender was asked by a borrower what’s the maximum they could buy that wouldn’t affect their loan qualification. Her answer was if it costs more than $30 don’t buy it.
How to determine what you can afford
Before you go to a mortgage lender you might also want to determine how much house you can afford. There are a number of calculators available online that would help you answer this question. For example, Bankrate has a simple calculator where you type in your wages, any investments or dividends or other income and then your down payment, the term of the loan in years, the interest rate, how much homeowners insurance will cost you per year and your real estate taxes. You will need to list your car payment, any alimony you are required to pay, your credit card payments and any other debts. Then press a button labeled Calculate and the program will tell you how much of a monthly payment you should make and how much home you can afford.