When applying for a mortgage, lenders must review your financial situation in order to assess your ability to repay. Some of the most important qualifications that mortgage lenders need to see in order to approve a borrower for a loan includes steady income, low debt, a high credit score, job stability, and savings for the down payment.
The biggest red flag for lenders when it comes to approving a mortgage is a high Debt-to-Income Ratio (DTI). The suggested DTI by the Consumer Financial Protection Bureau (CFPB) is a maximum of 43%. DTI is measured by dividing your monthly debts by your gross income. The lower your DTI is the larger the loan you will be eligible for. You can improve your DTI by paying down your debt or increase your income.
The second biggest red flag has to do with your credit. While credit scores are the third largest red flag lenders also review your credit history. Applying for multiple forms of credit, whether it is a credit card or a car loan, while going through the mortgage process can hurt your mortgage standing. This is a red flag because taking on more debt will affect your DTI and your ability to repay the mortgage. It is important to keep a clean financial record while obtaining a mortgage and avoid applying for credit, making large purchases, or do anything that will affect your credit, debt, income, etc.
As mentioned previously, a low credit score is the third largest red flag. Your credit score is comprised of payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit (10%). Credit scores range from 350-850 but the lowest credit score generally accepted for a mortgage is 620. The higher your credit score the better interest rate you will be offered because there is a greater chance you will pay off the loan. Measures you can take to improve your score would be paying down debt, paying your bills on time, every time, and correcting any errors that may be on your report.
Rounding out the top five biggest red flags is frequent job changes and lack of savings. It’s important for a lender to see steady employment so they know you have steady income to pay the mortgage each month. Lack of savings is also worrisome for a lender as it makes you as the borrower more of a risk as there is less of a cushion to fall on if something were to happen like losing your job.