The first question on our minds when we decide we want to purchase a home… “Would I qualify for a home loan?” Believe me when I tell you, I know the struggles of getting approved for financing better than most. Because of my health struggles, our credit score has always been something we have to work on and worry about. We had so many medical bills that went to collections before I was even released from the hospital, that trying to catch up was a hilarious joke. Except that there was nothing hilarious about it. Nothing at all. And the credit bureaus don’t care much about your situation, so we’ve spent the better part of our marriage playing catch up and trying to clean up our scores. Luckily, they’ve been high enough (just barely) to qualify for financing a home, most of the times we’ve wanted to… but we’ve had to make sacrifices instead of doing what we really wanted to do, (more details on that later) and we’re still working to get above that 650 mark. We’re close, we’re finally so close!
When attempting to qualify for a home loan, there are so many more things that go into it than one might think. It’s not just about whether you can afford it. Of course, that’s part of it.. but lenders want to know so much more than that, for example:
- How long have you worked at your job?
- How long have you lived in your current home?
- Are you self employed?
- How long have you been self employed?
- Did you make a profit last year?
- What type of loan do you have on your current home?
- What’s your credit score?
- How much debt do you have?
- What are these deposits on your bank statement from?
I mean, the list goes on and on… that’s just the beginning. And the answer to any number of these questions could make or break whether or not you qualify to finance a home. So when you’re ready to begin qualifying for a mortgage, it’s important that you understand a few basic principles so that your loan will go smoothly. In my humble opinion, and based on a fair amount of personal experience, these are the things I think are among the most important to know before you start.
Credit Score Matters
In order to get a loan with a decent interest rate, you’ll want to have a decent credit score. Now when I say “decent” I don’t mean perfect… I don’t have a perfect credit score. But if you have at least a 620, you should be able to accomplish something. You’ll find that recent derogatory accounts, late payments, bankruptcies, and high credit card balances will hurt you just as badly, if not more than your credit score. Make sure that all your bills are being paid on time, and that your credit card balances stay around 30% of your limit. Underwriters like to see that you can use the credit lines without filling them up.
2 Years Is The Magic Number
Everything is two years. Lenders want to see your two year residence history and they want to see two year job history. They’ll want you to have been at the same job (or at least in the same industry) for at least two years and job gaps are a no-no. They aren’t an automatic deal killer, but it can cause problems. So if you’re looking to purchase in the near future, stay put. No job changing until after your loan closes.
No New Lines Of Credit
You may not realize that when you apply for a new credit card at Kohl’s or Best Buy (or wherever, really) your credit score takes a little dip. There’s no way to know how much or how little… I’ve never been able to figure out the algorithms, but it just happens. But even more importantly than that, it could mess up your debt to income ratio, which will directly affect your ability to qualify for a loan. Once you’re in process for a loan, do not let anyone make any credit inquiries. No applying for a credit card, no new car loans… that’ll kill your deal in a hurry. Wait until after closing.
Beware of Cash Deposits
When I worked in the mortgage industry, the underwriters wanted to know the source of any deposits on your bank statement that were over $500. Nowadays, I swear it’s been lowered to like $150 or $200. So if you can avoid it, try not to deposit lumps of cash into your account. If you sold a bunch of stuff on Craigslist and deposit $1,000… first of all, I’d love to know how you sold anything on Craigslist for $1,000 because I’ve never made more than $50.. okay that’s besides the point. Any deposits that aren’t your regular direct deposit paycheck, you’ll have to explain in a letter to the underwriter. So do yourself a favor and maybe just use the cash for groceries that week. If you have to deposit it, just know that it could possibly wreak havoc on your loan, depending on where it came from, and you will most likely have to explain it to the underwriter.
Self Employment Is A Pain
If you’re self employed, be prepared to provide every piece of business documentation that you never even knew existed. On top of all your tax returns, K1’s, and a whole bunch of other tax related documents that I don’t know anything about, you’ll need to show that you made a profit for the previous 2 years (there’s that magical number)! A lot of self employed people will write off as much of their business expense as they can, but just make sure when you get down to that bottom line, you didn’t take a loss. Also, if it’s early in the year, they will be expecting your tax return for the previous year.. so be prepared to file and get it over with. It’ll make things go much smoother. I believe you can show proof of an extension, but I’m not sure about that one. You’ll have to consult an actual lender. :o)
Sometimes You Can’t Get What You Want
I mean, this really could be a life lesson… but in this instance, I’m referring to loan guidelines. For instance, when we lived in Pflugerville, we owned this cute little house (check out our house tour here) but we had to move to be closer to work. What we really wanted, was to keep it as a rental, because we knew the value would keep increasing. Unfortunately, we had purchased that house on an FHA loan because our credit score wasn’t high enough to buy it with a Conventional loan. So, even though we could afford to keep it… we had to sell it because you can’t have 2 FHA loans at the same time. I think there are some exceptions to that rule, but none of them applied to us, so we were out of luck. So we sold it, and bought our house in Garlic Creek, (check out that house tour here). Well, as luck would have it, we ended up moving… again and once again we wanted to keep the house. Unfortunately, even though our credit score continues to improve, we are still shy of being able to purchase a home on a Conventional loan… so once again we had to sell it. Credit score really does matter, my friends.
So the next time you find yourself asking, “Would I qualify for a home loan?” just make a quick rundown of this list. I am in no way an expert on the topic, but I do have a fair amount of experience on both sides: as a borrower, and on the lending side. There are many more things to know, obviously.. but this is a pretty basic start to the kinds of things you’ll be needing to think about. That being said, buying a home is such a great experience and it’s totally worth all the trouble and stress! I just hope this starter list helps to prepare you and perhaps lower the stress level just a bit. Don’t forget to check out the 5 Things I Learned During Our Home Search. Happy House Hunting!