Owning a dream house is one of the goals we have in life. After some thorough search and scouting, you realize you can’t pay in full cash so you decided to apply for a mortgage.
In reality, not many can afford to purchase a property in cash so you are left with the only option of applying for a mortgage. Here’s where lending companies come in the picture. When it comes to applying for a mortgage, no one wishes to get denied. The reality is that not everyone who requests for a mortgage is granted but instead gets denied due to various reasons.
Over the years, most mortgage companies have become lenient with loan requirements and those who typically cannot afford in purchasing a home now have the ability to get it through the help of this leniency in mortgage application requirements. Some of these companies require less than 20% down payment. Others also offer rent-to-own payment schemes for flexibility. Both options definitely made low to medium income earners in purchasing property more attainable.
While there is leniency with mortgage companies nowadays, they still have common standards for all loan applicants to satisfy. No one wants to be on the receiving end of any mortgage denial because of minor mistakes which could have been avoided in the first place. Here are some helpful tips on how to avoid being denied when you apply for a mortgage.
One of the main reasons for denials in mortgage applications is poor or bad credit history.
Mortgage lending companies always check credit reports that consist of your financial background including your payment history and previous loans. These are what mortgage companies look for before approving a loan to borrowers, and mortgage lenders do not approve loans with bad credit standing. Always make sure that you have a high credit score, and if you don’t, improve and build it up.
A blemish-free credit history will help you with the mortgage application so make sure you do everything to keep it clean. If you are currently suffering financially, ask for payment options and work with your bank. Remember that mortgage lenders have easy access to your credit report, so do everything to make sure that you have a good credit standing.
Staying away from unnecessary debts will help you keep a good credit standing. Lenders can also easily evaluate how you manage your finances by looking at your bank account statements. Ensure that you have a good history of your personal accounts by paying your debts on time and in full. You don’t want bouncing cheques and late payment to affect your credit standing which is also linked to your Debt-In-Income ratio. If you have a blemished credit history, it will help to take some steps to improve the situation before applying for a mortgage.
There is no doubt that the best way to improve your credit report is to pay your bills on due date consistently, use credit responsibly, and let time help to restore its health.
In some cases, financial institutions may look the other way when it comes to your credit standing and debt-to-income ratio. You can still avail of a mortgage loan but they usually require steep interest rates which are not recommended for first time home buyers.
Undoubtedly, mortgage companies check your capacity to pay the loan that you will get from them. This also means that they will thoroughly examine if you have a stable source of income. There are also third-party verification with your banks to check if you have a steady income.
You need to show that you are capable of purchasing the property by proving that you have the cash in your bank account to pay for it. It is mandatory, in getting a mortgage, to pay for the downpayment which typically ranges from 10% to 20% of the purchase price.
Certainly, there’s no better way to prove your purchasing power by having a consistent source of income and most cases, mortgage companies require borrowers to be working with the same company for at least 2 years of tenure. One of the best ways to improve your employment and income record is to avoid any gaps in employment and ensure all your income is can easily be verified.
Financial institutions like banks always confirm that the applicant can pay the loan back before they grant the loan money out. If you switch jobs too often, some lenders will consider this financial instability and deny your application for a mortgage. Make sure that you are stable job-wise before requesting a mortgage.
Debt-income-ratio is the percentage of your monthly gross income allocated to paying your monthly debt. Checking your debt-to-income ratio is one of the key factors mortgage companies analyze and it essentially states that all of your monthly debt payments should only be 36% of your monthly income. This includes all your debts such as credit cards, car loans and any other monthly bills you have. If you have too much debt, it can keep you from getting your mortgage loan approved. Lenders primarily want to make sure that you are only obligated to pay no more than 38% of your monthly income towards your debt. Always remember to aim for a debt-to-income ratio of 36%, which means no more than 36% of your monthly income will go for debt payments.
Prior to granting people’s mortgage, banks typically assess if you are a debtor or a debt-free person that’s why it’s important to make it a priority to eliminate all your debts if possible. Too many debts equal red signal to banks. Start giving yourself time to pay off some of your debts to increase your chances of bank granting you a mortgage. You can, however, reduce your debt-to-income ratio by increasing your income. It may be difficult for others, but this will definitely help a lot to qualify for a mortgage loan.
Additionally, keep in mind that you are paying more to the interest than the actual purchase price of the property so analyze and examine your financial situation carefully before making a decision.
It is also helpful to sit down and ask advice from a lender or a mortgage company. Ask what steps they recommend you take before applying for a mortgage. Some of them will even work closely with potential borrowers like you to help you address whatever difficulty that stands in your way and your plan of owning a house.