Mortgagesaren’t just handed out like free toasters at a bank. On the contrary, before lenders forkover thatbig bundle of cash that you need in order to buy a home, they’ll size you up carefully to try to determine whether you’re worth the risk. And to do so,they’ll take a hard look at your financial past, scanning for signs that you’re a good or bad bet.
Yup, it can be a stressful process (for you, not for them). But before you freak out entirely, be aware that not all financial misdeeds are created equal. Some are mere blips, while others spell thermonuclear disaster. So which is which? Here’s a rundown of the topmortgage approval land mines, ranked from least to most serious.
Student debt
Risk level: 1/10
Student debtin itself is no biggie at all, saysMark Yecies of SunQuest Funding in Cranford, NJ. However,lenders will raise an eyebrow if they see signs you’re struggling to pay it off. That means late payments are a no-no.
If you’re sliding into that territory, a better option is to sign up forstudent loandeferment,forbearance (temporarily delaying payments),or an income-based repayment program. Beware: Don’t presume these are silverbullets, becauseyouwill have to pay off this loan one day.Sokeep chipping away at it toensure college tuition won’t derail your homeowner dreams.
Employmentchanges
Risk level: 2/10
Lenders definitely like to see worker bees with a solid record of gainful employment. If you’ve recently changed jobs, that’s not necessarily bad, becausepeople job-hopall the time—as long as it’s roughly in thesame line of work and compensation level, lenders won’t blink an eye.
That said,employment statuschanges can give them pause. If you hada full-time staff job that paidW-2 income and become a 1099-compensated “consultant,” you become technically self-employed. As such,lenders will typically want to see two solid years of income history before they’re comfortable loaning you money.
If you are newly self-employed, you mightbe able to secure mortgage financing with the help of a non-occupying co-borrower, but otherwise you mighthave to waitat least a year untilyou can document income on your tax return.
A mediocrecredit score
Risk level: 3/10
Your credit score—that all-important numerical summaryof how well you’ve paid offpast debts—isakin toyour SAT score when you were applying to college. For better or worse, it’s a tool that helps lenders quickly judge your financial worthiness.
Scores can run the gamut from stellar to average to subpar, so your riskiness in the eyes of the money guys depends on where you fall on that spectrum.
Typically, a “good” credit score is considered to be 700 and up (a perfect score is 850), which shouldqualify you for the best interest rates and other perks. On the lower end, the minimum credit score you’ll usually needto be considered for a mortgage is 660. The lower the score, the higher the interest rates you’ll be saddled with. If you have a score in the low 600s or below, get to work on improving it. With some diligence and patience, there are plenty of waysto boost your credit score.
Inaccurate disclosure of income
Risk level: 4/10
Of course you know how much money you make, right? Well, if that number’snot so clear-cut from a lender’s point of view, itcan land you in trouble.
“In many cases, borrowers state their income inaccurately because they don’t actually know how much money they make,” says Yecies. “They may think they do, but don’t realize thatfor mortgage purposes, bonus, overtime, and commission are calculated separately from base employment income, which is what lenders are really scrutinizing.For self-employed borrowers, calculation of base income can be even more complex.”
So be sure to accurately portray your income and separate out your bonuses, overtime, and other details rather than lumping them all together hoping for a higher total.
Undeclared ‘help’ with your down payment
Risk level: 5/10
Havea great unclewho’s loaded and would like to pitch in to help defray your home-buying costs? Congrats! But make sure to declare this money as agift, or it could hurt more than help.
There are rules for where down paymentmoney can come from, so if there’s a large unidentified deposit lurking in one of your accounts, rest assured lenders will want to know how it got there. As such, you’ll need a letter from the donor delineating the amount, date of transfer, and assurance that these funds won’t require repayment.
Whatever you do, don’t fib or try to cover it up; lenders frown on that big-time.
Bankruptcy
Risk level: 7/10
Blame it on Monopoly, the Great Recession, or anything else, butbankruptcyis scary—it means you’ve thrown up your hands at some point in your past and declared that you wereunableto pay off yourdebts. In real life (rather than a board game),bankruptcy can bea godsend ifyou’re really in over your head, because itallows you to start fresh. Nonetheless, it will make lenders leery … but not forever.
Once a bankruptcy is more than two years in the past, you’re back in the home-buying game; just be sure to re-establish a credit history and keep it sparkling clean with on-time payments.
Foreclosure
Risk level: 8/10
Bankruptcy isbad, but foreclosure is worse, at least in the eyes of a lender. To state the obvious: Becauseit means you were unable to pay your mortgage once, it doesn’t bode well for a new lendergetting itsmoney back, either. However,as with bankruptcy, time heals all wounds. Lenders will typically be open to reviewing your application around seven years after foreclosure, or just fouryearsafter a short sale (where you sell your home for less than you borrowed).
