The first step in the home financing process is getting pre-approved. Once you’ve been pre-approved you’ll have a good idea of how much you can borrow to buy your dream home.
During pre-approval, you will be asked to provide employment history, financial information that ideally demonstrates good credit, a stable income, a low debt-to-income ratio, and availability of funds to meet the down payment.
But what if you can’t qualify for a pre-approval based on one or more factors? That doesn’t mean you have to give up on your home financing dreams! The following are the most common reasons you may not be able to get pre-approved and how to correct the deficiencies to prepare for reapplying later.
Credit Issues
As with any mortgage loan, lenders want to be sure that you are a reasonable business risk, which is why a “credit pull” review is an essential part of the pre-approval analysis. A low credit score can be the result of several factors, including late credit card payments, the recent opening of multiple credit accounts, or an excessively high debt balance. You can improve your credit picture to help ensure a successful future pre-approval by:
- Checking with credit card companies if you believe specific late payment notifications are incorrect.
- Making loan and credit card payments on time.
- Reducing the balance of your total outstanding debt, including revolving credit card accounts.
- Not applying for new credit cards.
- Avoid canceling unused credit accounts. Any debt that you’ve paid off on time is a positive sign on your overall credit score.
You should also avoid “quick fix” credit repair scams. If you feel additional support is necessary, it might be wise to contact a reputable credit counselor for advice.
Debt-to-Income Ratio
The debt-to-income ratio (DTI) is a critical part of a borrower’s full credit analysis. DTI compares your monthly debt payment to your monthly gross income. An exceptionally high ratio is a concern because it means you might have difficulty paying your monthly credit card bills, along with your mortgage loan debt. A lower ratio indicates that you are effective at managing your finances and better able to meet all financial obligations on time.
One “simple” solution to a high DTI is to pay down more of your recurring credit balances, thus reducing the ratio.
Of course, an increase in monthly income from a promotion or other source will also help reduce an overly high DTI, although you have less control over this.
Employment History
The ability to repay your loan largely depends on your monthly income, so stable employment history is a primary consideration for pre-approval. An uneven employment record could be another reason for not qualifying.
A general guideline is that a borrower must be employed for at least two years, although not necessarily with the same employer.Supplying apay stub showing year-to-date income as well as W-2 forms covering two years of employment is proof of your work record.
You may be able to show how extenuating circumstances created a brief employment gap. Otherwise, the obvious way to alleviate a significant deficiency is to continue employment for the desired time and then reapply for your mortgage once you have been consistently employed for about two years’ time.
Cash Reserves
Not only do mortgage lenders require a down payment with most loan program options to get a mortgage, but they also want to see that you have cash reserves to cover your mortgage payments should any emergencies arise.
If you lack this cash reserve, you may need to save up before a mortgage lender will pre-approve you. Many lenders will require at least 2 months of cash reserves but a great goal would be to have at least 6 months worth of mortgage payments in your rainy day fund.
It’s important to remember that not qualifying for a pre-approval is usually just a temporary roadblock on your path to achieving your home financing goals. It may take a little longer to realize your goal, but you can be successful with patience and extra effort. If you think you’re ready to begin the home financing process, get started now!
