No doubt about it, applying for a mortgage can be a long and involved process that can leave you feeling drained and financially exposed. But it’s in your best interest to be transparent with your finances during this part of the home buying journey, particularly if you have issues that might hinder your loan approval. There are a number of credit issues that may affect your application for a mortgage loan; however, most of the challenges can be overcome.
One of the credit issues that may affect your application for a mortgage loan is that an underwriter will review your documentation and may discover that your earnings are actually less than what you disclosed on your loan application, after reviewing your proof of income documents. One of the ways you can challenge the disputed income is by getting a written employment verification to detail your income, by identifying such items as overtime and bonuses. If you are self-employed, a seasonal employee or cannot validate proof of steady income over the course of two years, you can search for a lender and loan programs that may qualify you with the reduced income. Both of these steps may be very helpful to you if your income has not been consistent for the most of the past two years.
You already know that your loan officer reviews your credit report and score as they evaluate whether or not you qualify for any loan program, but did you also know they consider the amount of debt you’re carrying? For example, if you’re carrying more than a 45% debt-to-income ratio, you may have to make some changes to be able to qualify. Some suggestions include reducing your proposed monthly mortgage payment (by either considering a lower loan amount or increasing the downpayment), reducing or eliminating other consumer loans, and consider revisiting your income, to include more income in the calculation.
Keep Credit Lines Open
If you decided to pay off all your debts, avoid the temptation to close your accounts, as this may lower your credit score. Lenders don’t look upon this favorably, even though it may seem a smart way to reduce your debts. Instead, if you decide to pay off your debts, keep the accounts open so that it shows your debt is paid, it continues to show your good credit history, and the account is still available for future use.
Negative events on your credit report can affect your loan approval. For example, if you were involved with a short sale within the last four years, you may have to show proof that it’s been sold and you are no longer contractually obligated for that debt. Additionally, it may limit what loan programs are available to you. If you’ve been financially linked to any other property within the last seven years, those items might show up as well – and if you’re not liable for those properties anymore, you might have to show documentation proving as such.
If you have any questions about this, your loan officer is on hand to help you. After all, they want what’s best for you – and they want to qualify you for your potential new home.