If you are trying to get a mortgage, the number one thing you need is affordability. How much you earn in relation to how much you spend can make or break your mortgage application. Here are some things to consider when you’re trying to figure out how to best improve your chances of borrowing money on a mortgage…
The number one reason why mortgage loans do not happen is not having a credit score, and it is not down payment, but biting off more than you can chew. Overconsumption is the number one reason why people fail to get mortgages. Not reporting income, not showing income, working fewer hours in relation to a proposed mortgage payment with other monthly obligations can be problematic for some people depending on their unique specific financial situation.
Payments on such obligations like car loans, student loans (even if they are deferred), credit card payments, installment loans, tax payments, child support payments, alimony payments and all monthly reoccurring obligations such as this can dramatically lower borrowing power and subsequently your ability to qualify for home financing.
For every dollar of monthly debt it typically takes about $2 of income in most cases to offset the obligation. Simply put if you have a car payment at $500 a month it is going to take $1,000 a month of income to offset the obligation so the payment does not hurt your borrowing chances. If the relationship from debt to income is less than the ratio of 2:1 it will adversely affect your loan application and you may have to pay off debt, change loan programs or put more money down when buying a home or look at the possibility of getting a cosigner.
Consider the following example: let’s say your proposed mortgage payment is $3,000 per month comprised of principal interest taxes and insurance on top of that on a monthly basis and then you have another car loan at $500 a month, another personal loan at $200 a month so you have $700 a month in consumer obligations. In other words, your total monthly outflow is $3,700 per month. As long as you have a good credit score most lenders will let you have income at least $7,400 a month in order to support that type of payment.
In this example, if your income was said $6,700 per month that would represent a 55 percent debt to income ratio which could be problematic depending on the type of mortgage loan you’re looking for. An FHA loan would probably fly, a conventional loan which is the most sought-after loan in America, probably not so much. So here are a few pragmatic ways to improve your borrowing power to make the numbers fit within your financial bucket.
1. If you are self-employed stop writing everything off. This hurts your ability to qualify. Start paying the piper, paying the taxes based on the income and the revenue that you generate, stop being creative and show the income necessary to qualify for financing.
2. You can always pay off debt- maybe instead of putting down 20 percent on the house you take 10 percent off and reallocate those monies towards paying off consumer obligations.
3. Get a cosigner, swallow your pride, ask for help. If you really want to buy that house ask for help from Mom and Dad or a family member etc. you might actually find whoever you might ask in your life might actually be willing to help you which subsequently could help you purchase a certain house in a certain desirable neighborhood for example or allow you to save big money on a refinance. Most of the time the financial gain of getting the cosigner and making the math pencil is a far greater value than the discomfort of asking for a co-signer.
4. You can switch mortgage loan programs as long as you have a good credit score and you have the cash to work with and you have a lender who is willing to be creative and do what is necessary to get you and your family into the house.
We are still in an economic climate that requires you to prove ATR Ability To Repay which means you have to provide supporting specific documentation for your income, your credit and make sure you can actually afford the mortgage. The government is very specific and if you don’t fit the box, a creative lender willing to go the extra mile might be the separator between where you are and where you’re intending to go financially, something to think about next time you’re in the market for home financing.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.