When you apply for a mortgage, lenders typically look for a solid work history, good income with upward mobility, and a great credit rating. The truth is that not everyone who gets a mortgage has perfect data when they apply.
Some applicants have all of these but one, or they have other limitations that make them less than ideal as a candidate. These tips can help you to identify what lenders are looking for, and how to find solutions to possible problems with your Bay Head area home application.
Every financial situation is unique, so make sure to work with your lender and/or a financial advisor to see what can work for you.
Obviously, a good employment history is vital for your mortgage application. The lender wants to know that you are gainfully employed and able to make a consistent income. To show this, most lenders want evidence of current employment and a record of at least two years of consistent employment. You can usually prove these with current pay stubs and W-2s from the past two years.
Problem: Inconsistent Employment Record
For people who are self-employed or have an inconsistent employment record due to layoffs, illness or caring for a family member, showing regular employment may be more difficult. If the goal is to show that you can earn a predictable income, relying on the peaks and valleys of self-employment makes it harder to prove that you will be able to bring in the money to pay your monthly mortgage payment on your new oceanfront home as well as your other obligations.
Solution: Better Documentation
Fortunately, lenders are realizing that the growing ranks of self-employed in the United States need easier methods to demonstrate that they have regular work. Lenders now only require self-employed applicants to show one year of federal income tax returns in order to qualify for mortgages purchased by Fannie Mae (Federal National Mortgage Association). If you want to show that you have a steady business with growth potential, provide as much current documentation of it as you can. This could include proof of grant funds or large business contracts.
Your credit history shows potential lenders how you handle debts. Of course, everyone has monthly responsibilities that are not related to debt. However, your record of paying off credit cards, student loans, and car payments are all very closely tied to what lenders will expect you to do once you own a home with a mortgage. Credit history often serves as a threshold for those who can qualify for a mortgage with a typical lender.
Problem: Minimal Credit History
Financial experts often speak on the trouble of having too much of a negative credit history. They caution consumers to avoid going into debt for regular expenses or for extravagant leisures, because they can be difficult to pay off. Some people take this advice so carefully they never open credit lines at all. As a result, you may make all your rent and utility payments on time but have no credit record to show for it.
Solutions: Accurate Reporting and Alternative Payment Records
Lenders will use whatever is in your credit report, even if it is from a few years ago. It is your job to make sure that all present records are completely accurate. Check your credit report and file a correction against any inaccuracies, months before you start to apply for mortgage loans. To make up for a lack of credit history, ask your landlord to give you evidence of on-time payments for the past year or two.
Your income determines how much of a mortgage you could possibly get. In traditional loan programs, many lenders want the total monthly mortgage payment (principal, interest, taxes and insurance) to be less than 28 percent of the total gross income of all applicants. Federal Housing Administration (FHA) loans may allow as much as 31 percent of your gross income to go toward your mortgage payment.
Problem: Low or Fixed Income
The primary issue with lower income is that it limits the amount of money that borrowers can get in a mortgage. Housing prices do not always stay in line with regional household income, which can make it harder for people even with average wages for the area to buy a reasonable home. Applicants who are young or building their careers can at least plan to get better jobs in the future. Those who are retired or living on permanently-fixed incomes must work with what they have.
Solutions: Low Income Loan Programs and Asset-Based Loans
Some loan programs are designed to help people with lower incomes qualify for a mortgage to buy a home. They may allow a slightly higher ratio of debt-to-income, or minimize the amount of private mortgage insurance that must be paid. Borrowers with significant assets but little income should consider loans based on their assets as income.
The standard down payment for a home these days is about 10 to 20 percent. Lenders place limits on the sources of the funds, so getting together the money needed to buy a home is sometimes more easily said than done. Gifts from friends or relatives are generally accepted, and some people may withdraw funds from an independent retirement account (IRA).
Problem: Insufficient Funds
For anyone who does not already own a home that gains value over time, a 20 percent down payment may be an onerous expectation. The down payment usually comes on top of closing costs for the home and mortgage, plus any moving expenses and purchases that must be made before you can move in. In an area with rapidly rising home values, waiting years to save up a considerable amount for a down payment could price buyers out of the market until the next correction.
Solutions: Low Down Payment Options and Down Payment Assistance
Many mortgage programs, especially those targeting first time home buyers, offer the ability to make a smaller down payment. FHA loans may require only 3.5 percent in a down payment, while Fannie Mae and Freddie Mac (Federal Home Loan Mortgage Corporation) purchase loans offer a 3 percent down payment. Buyers who fit certain demographic requirements or plan to buy in certain areas can also qualify for down payment assistance in the form of scholarships or a higher percentage of financing.
Applying for a mortgage and hoping that it will be approved could be nerve-wracking, especially if you know your application is not spotless. With these solutions, you can reduce the effects that these common problems can have and increase the likelihood of approval. For further instruction, consult a financial expert to offer direction for your specific needs.