Factors That Could Impact Your Home Loan Approval
Buying a home is part of the American dream. If you’re like most, you’ll probably need to obtain a home loan to make that dream come true. It is important to know the many factors can affect your home loan approval. Here is a list of some of the reasons your loan may not be approved.
Credit History
Your credit history is perhaps the largest obstacle to overcome when it comes to home loan approval as it carries the most weight in determining your credit risk. Financial institutions that lend mortgage loans are specifically looking for the following as potential reasons to decline your home loan approval:
- Late payments
- Missed payments
- Previous foreclosures or bankruptcies
- Large amounts of outstanding debts
Your best bet is to pay off your outstanding debts and establish a solid, recent history of on-time payments. While you can’t remove the negatives on your credit history, you can show good-faith efforts to improve. That will resonate with lenders as well – over time.
Be proactive and monitor your credit report. There are free services available that can alert you when a new credit inquiry is initiated, a late payment is reported, a new account is added to your profile, and more. Many monitoring services will also send you personalized tips to help improve your score and educate you on what may be hurting your score. Check out our blog post on building your credit!
Debt to Income Ratio
No matter how good your credit is, lenders also want to feel confident that you can reasonably pay any new debts you take on. That’s why they explore your debt vs. your income to determine if you can afford to take on additional financial obligations and repayments.
To calculate your debt-to-income ratio, the first step is to add up your monthly bills (not including your living expenses such as taxes, gas, utilities, and groceries as they’re generally not included in this calculation.):
- Rent or mortgage payment
- Alimony or child support payments
- Minimum credit card payments
- Student loans
- Auto loans
Divide the total of your bills by your gross monthly income. The number you are left with is your debt to income ratio as a percentage.
Example: $2,000 (expenses) ÷ $5,000 (before-tax income) = 0.4 (40%)
If this ratio does not meet their criteria for approval, your loan could be denied or conditionally approved. While each lender will have their loan approval criteria, ideally, you want this ratio to be below 40 percent; the lower, the better.
Down Payment
Most home loans require at least some money as a down payment. While there are a few programs that offer zero-down mortgages, you may have other conditions such as a higher percentage rate or PMI. The more you can put down, the better the odds that you’ll not only be approved for the loan, you may also qualify for a lower interest rate.
Twenty percent of the home price is usually the standard amount of down payment you’ll need. If you’re having trouble coming up with a 20 percent down payment for your mortgage, consider specialized loan programs offering down payment assistance or allowing you to purchase with lower down payments and private mortgage insurance.
Home Appraisal
Once you’ve found the home of your dreams, then you have to have an appraisal. All lenders will order an appraisal during the mortgage process – this due diligence is intended to protect the buyer (you) and the lender. If the valuation comes back lower than the asking price for the home, you may have some road blocks in proceeding with the purchase. There are some options available to you if this occurs, such as coming up with the difference between the appraised value and the loan value yourself or asking the seller to reduce the price to reflect the home’s appraised value.
CAMPUS Can Help!
Buying a home is an exciting time but could be a little confusing for a first-time homebuyer. Our home loan experts are here to guide you through the entire process and help you make the best financial decisions for you and your family.
To learn more about home loans or to receive answers to your mortgage questions, please email _mortgageoriginators@campuscu.com or give us a call at 800-367-6440 and press 5.
Other Resources:
Video: Our Mortgage Experts Provide Tips for Buying Your First Home
3 Things to Avoid When Applying for a Mortgage
Best Way to Save for a Mortgage Down Payment
The Three Most Important Documents When Buying a Home
By Campus USA at 16 Sep 2020, 16:44 PM