How to Avoid Getting Turned Down for a Mortgage
When you are ready to buy your dream home in New York’s beautiful Finger Lakes region, chances are you will apply for a mortgage. But filling out a mortgage application is no guarantee that the bank will grant the loan.
Even if you are the most creditworthy of borrowers, there are a lot of underwriting guidelines for you - and the property. You probably know that your credit score is an important factor when the lender considers your mortgage application, but what you might not realize is that they look at recently opened – and closed - credit accounts and take it into consideration if you are a co-signer on other loans. There is also the possibility that there are mistakes in documentation like credit reports that can hold up your mortgage approval.
Here are some things you can do ahead of time when you want to buy a house to avoid roadblocks, boost your chances for approval and avoid getting turned down for a mortgage.
- Clean Up Your Credit
You typically need a minimum credit score of 620 to obtain a mortgage. Keep in mind that some government-backed mortgages, like FHA (Federal Housing Administration) loans and VA loans for veterans often have lower credit score requirements.
Even if your credit score is good, an inadequate credit history can prevent you from getting a mortgage. If you do not have enough of a credit history with credit cards, auto loans, student loans and other forms of credit, the lender may deny your mortgage. If you were late with previous mortgage payments or if you have a bankruptcy, foreclosure or short sale on your record, it may prevent you from obtaining a mortgage.
- Know How Much You Can Afford
You might love the large estate home on the lake down the road, but if you need a mortgage and you don’t have the income to cover a large mortgage amount, you are likely to be denied. Banks look at your Debt-to-Income (DTI) ratio to determine how much money they will lend. They want to make sure you can make the payments.
While the maximum DTI ratio can vary by lender, generally speaking the acceptable ratio is somewhere between 40% - 50%. So, for example, if your W-2 form shows that your annual income is $120,000 or $10,000 per month, and your monthly expenses will be $3,500, your DTI ratio is 35%.
- Don’t Change Jobs
Your lender will also look at how long you have been at your job and whether you have been earning a good salary for a while – say a couple of years. Even if you have a great job offer, wait until you secure your mortgage before you change your employment.
4. Have Enough Assets
Make sure you can show the bank that you have the down payment and a few months in reserve so the lender will see that you will be able to afford your mortgage payments. If you borrow money from friends or family and put it in your bank account, the bank may ask you to document where the money came from. Make sure you have the proper documentation to show where the money originated.
- Calculate your LTV
The bank will certainly calculate your LTV (Loan-to-Value ratio), and so should you.
To find out your LTV, simply divide the amount of the loan by the purchase price of the house. So if the home you are interested in purchasing is valued at $500,000 and you putting down $150,000, your Loan-to-Value ratio is $350,000 / $500,000 = 70%. Your loan is for 70% of the value of the house.
The more money you put down, the lower your LTV and the less risk to the lender. You will be more likely to get a mortgage approval, and as an added bonus, you will probably get a lower mortgage rate on the loan.
- Don’t Overpay for the Home
In a seller’s market when buyers clamor for inventory, you may become aware of bidding wars where multiple buyers compete for the same home. If possible, avoid this situation because the competing offers may push the price beyond the market value, making it less likely you will get a mortgage approval from your lender.
To give yourself the best chance of getting your mortgage application approved, pay down your debt as much as possible and save up to make a larger deposit. Check your credit report with the three biggest credit agencies and correct any errors you might find. You can also boost your chances by registering to vote. When you register, you are making it easier for lenders to confirm your identity and your address. It is not a good idea to open new loans or credit cards just before you apply for a mortgage.
Buying a Home in the Finger Lakes
Professional real estate agent Kelli Ide can help you make smart decisions when you are looking to buy or sell property in New York’s Finger Lakes region. Count on Kelli to guide you in getting the information you need to make your mortgage application attractive to the bank so you get a quick approval.
Kelli Ide specializes in luxury estates, historic properties and lakefront vacation homes in New York’s Finger Lakes region. She offers a unique, concierge-style approach to real estate, including staging, photo styling and market preparation services exclusively for clients to give them an edge over the competition. For further information about buying or selling a home, visit kelliide.com.