Let’s get the rocks out of your path. What could possibly trip you up on your home purchase journey? Let’s find out if you are or are not ready to purchase a home.
Besides not having a high enough credit score (600 or higher at the time of writing) here are 7 other things that will make a bank say No.
Bankruptcy within the past 2 years
Your bankruptcy might remain listed on your report for 7 years but 2 years after it is Discharged, you will be able to use a mortgage to purchase a home.
The key word is “discharged.”
It’s not from the date you filed it but the date it was officially discharged per your credit report. How long before it’s discharged? That depends on which type of bankruptcy you filed. Check the requirements with a bankruptcy expert or attorney.
Missed or Late Payments in the past 12 months
Most banks want to see that you have at least maintained good credit habits for at least the past 12 months. This is great because you are rewarded for developing wiser credit habits, and not penalized for previous issues you may have faced.
Missed a payment recently? Let’s ask the bank if your reason for missing it is acceptable. If not, let’s mark our calendars for 12 months from this date.
*Medical bills are often forgiven by lenders easier than credit cards or auto loans for example.
Not having your taxes filed for the past two years
The bank needs to see you’ve been consistently employed for the past 2 years. This can be a W2 job or self-employment or a business.
Also, it’s not true that you can’t change jobs in the past 2 years. As long as your new job was in a related industry or if you changed jobs due to better benefits or perhaps you graduated and chose a new job in your field, all of these are acceptable reasons to have a job change in the past 2 years.
But whether W2 or self employed, you need to have filed taxes for at least the past 2 years.
Unpaid taxes
If you owe old tax debt, this could be an issue. Not your taxes last year, the issue would be something already in default status or in collections or a lien.
High Debt to Income Ratio
This is the percentage of your monthly income that goes toward “fixed debt.” Loans, credit cards, and lines of credit are considered fixed debt. So if yours total $1000 a month and you make $4000 a month, your debt-to-income ratio is 25%.
How is your income calculated?
The bank uses your past 2 years as a guide for your income. If on a W2 job** your income is based on the most recent paystubs, but they want to show that you’ve remained consistently employed for at least 2 years.
If you are self-employed or a business owner, your income calculation is different. Some lenders will take the average of the past 2 years income. While some others will focus on the past 12 months YTD income. I prefer the YTD version because of events like Covid.
A lot of people lost income in 2020 but many rebounded impressively into 2021. A bank that takes the average will assume you have a lower income. The banks that focus on YTD are rewarding you for the growth.
Based on the percentage you owe as fixed debt, your bank will determine a federally permitted amount that you can spend per month and they will approve you for a mortgage amount within those guidelines.
Starting up new lines of credit during the mortgage process
Do not open any new credit after you start the mortgage application.
This is a red flag to a lender because it looks like you might be risky with your credit. Just wait. From the day you start the application until you get the keys, it will be just a few months. Just wait until you get the keys to open any new credit cards or finance any purchases, like furniture or a car.
Low Appraisal
If the appraiser says the value is less than you have agreed to pay, the lender will refuse to move forward. What happens next?
Well, first we ask the seller if they will agree to lower the price to match the appraiser’s values. If the seller refuses, you have 2 options.
You could pay the difference yourself or you could cancel the agreement and move on to another property. If the house is valued at $195K but the contract says you’ve agreed to pay $200K, are you willing to pay the extra $5k upfront? If yes, then we’ll proceed. If not, then we’ll cancel and start looking for other options.
Do you have any of these rocks in your path?
If no, then you’ve got nothing stopping you from buying your home.
If yes, then let’s create a plan together to get you to your goals. Even if it’s your credit score that’s in the way, one quick consultation and you’ll get all the answers to jumpstart your process.