With different types of mortgages available, buying a home seems easier than ever. Even borrowers with low credit scores can now qualify for a favorable home loan. So if you have a good credit history and a stable income, what could go wrong?
Well, it turns out that a secure source of income doesn’t necessarily guarantee approval from your lender. Restrictions have been tightened, so lenders went harder in scrutinizing prospective borrowers. Thus, if you’re about to buy your first home, below are the obstacles you’ll likely face:
- A High Debt-to-Income Ratio
The debt-to-income ratio (DTI) is the measure of the amount of debt in your income. For example, if your gross monthly income is $4,500, and half of this amount ($2,2,50) goes to your debts, then that makes your DTI 50%.
That puts you at a disadvantage because most lenders set a 43% DTI limit for borrowers. To be approved for a mortgage, you either have to pay off your existing debts first or increase your income.
- Eligible Income Restrictions
Before taking on a second source of income, consider whether that job will pay you in cash. That’s because lenders now verify deposits that didn’t directly come from payroll. That means your extra income may do more harm than good since it’s impossible to verify cash deposits.
Furthermore, lenders generally don’t allow income from a second job, unless it’s obtained from the same source for 12 months, or within 24 months without an interruption of more than 30 days. And if your second income source isn’t documented on a W-2, then you’re even more likely to fail the application.
- You Are Self-employed or a Worker Paid in Cash
As explained above, cash deposits are usually faced with disapproval from lenders. That is particularly challenging if you are self-employed or a worker paid in cash.
You may also face this obstacle if you are a pregnant woman on maternity leave. That’s because lenders figure that expectant mothers are likely to stop working after giving birth, and thus stop earning income.
Hence, validate that you’re on paid maternity leave if you’re going to apply for a mortgage. If you’re not on paid leave, you can buy a home while the lender can still verify your income, once you’re back at work, or if you qualify on your spouse’s income.
- Your Existing Debts
If your income is sufficient that you don’t need a second source, you can reduce your DTI by paying off your existing debts, instead. One way to do that is by consolidating your loans.
In a nutshell, debt consolidation merges all your debts into a single one, so that you’ll only make one payment for different loans. For example, if you make five credit card payments, then consolidating them would turn them into one chunk of credit card debt.
However, you’ll need a good credit score to qualify for debt consolidation with favorable terms. If you happen to have bad credit, you may be eligible for an FHA loan or a subprime mortgage, though the latter usually has higher interest rates.
- Inexperienced Lenders
It’s crucial to pick an experienced lender from a reputable company. You can test their expertise by asking them questions. If they articulate their responses well, don’t talk in circles, and answer your questions with complete details, you’ve found yourself a suitable lender or loan officer then.
To ensure that you won’t end up with an inexperienced lender, you can ask a real estate agent or trusted peers for a referral.
These five obstacles to acquiring a loan may be daunting, but don’t let them dissuade you. After all, it’s better to take a challenge knowing what to expect, than blindly take it and be faced by unpleasant surprises.