Even Your Good Credit Score Could Stop You From Getting A Mortgage
How Risky Are You?
You thought you had good credit, in fact, you know you do. You’ve worked hard on establishing a good credit score and are ready to settle down and buy a house. But the only problem is that when you apply for a mortgage, you have been denied. Why? Well, unfortunately, your credit score is not the only factor that goes into evaluating you as a mortgage loan candidate. Don’t be surprised but if you have the wrong income amount, too much debt, the wrong ratio of debt-to-income or too much in credit card balances you could be denied a mortgage loan. Didn’t you know, you could be a risk for the mortgage company…even with a good credit score.
Mortgage companies sell risk. They have been burned before so to avoid foreclosures they base their loans on risk factors that are to access and evaluate. The one thing that all of the evaluating factors have in common is the ability to determine how much of a risk you would be to the mortgage company. From the perspective of the mortgage company they want a return on their investment, not the investment itself. In other words they want their money back not your house. But if you turn out to be a bad risk and cannot make your mortgage payments on time on a consistent basis, they will be forced to foreclose on you and they end up with your house.
The Wrong Income Amount
The mortgage lender is looking out for your best interest as well as theirs. They want to make sure you keep your house by making your monthly mortgage payments affordable for you. If your income is too low in relation to the cost of the home you are buying you will most likely have difficulties making mortgage payments. Remember that a mortgage will not be your only expense, don’t forget about all of your other expenses (food, clothing, auto upkeep and insurance to name a few). So they run a calculation that has nothing to do with your credit score. They add the monthly mortgage payment you would be applying for to the real estate taxes and homeowners insurance then divide that total by your gross monthly income. They would like to see this percentage come in below 28%.
For example, let’s say you earn $100,000 a year or $8333 a month (100,000/12). You are looking at a monthly mortgage payment, including taxes and insurance, of $2000. If you take your mortgage payment amount of $2000 and divide it by your monthly income of $8333 you would come up with your housing expense ratio of 24%. That is a good ratio, most lenders want your housing expense ratio to be less than 28%.
Too Much Debt
Mortgage lenders are very interested in how much debt you have. If you have too much debt, again, you are risky. If you are overloaded with debt, the mortgage company proceeds very cautiously. Again, lenders care about risk and if you already have a big debt load, adding to that burden with a mortgage payment spells trouble for them. To determine the risk they use a ratio comparing your total debt obligations to your total income. If you are carrying too much debt compared to your income, you could be denied a loan (even if you have a good credit score). If you have a good credit score, your debt-to-income ratio drops and your loan opportunities are better.
The debt-to-income ratio is easy to figure out. Just add up all of your monthly expenses, including your rent, car payment, student loan payments, insurance payments and credit card minimum payment amount. Then divide that total amount by your gross monthly income. That will give you the debt-to-income ratio. If your ratio is less than 36% you should be in good shape with that one measurement.
How Responsible Have You Been?
You show financial institutions that you may be unable to handle additional financial obligations such as a mortgage payment if you have used and abused your credit cards by maxing out, paying late or carry credit card balances. Your credit card history says a lot about how financially responsible you have been. History usually repeats itself so if you have consistently been a late payer on credit cards chances are that you will also make your mortgage payments late. Sometimes when people are always late and run into a financial jam, they just give up and quit paying altogether. Which is the exact situation mortgage companies want to avoid, so they take credit history very seriously. You will shine with a mortgage lender if you promptly make your credit card payments, pay your credit card balances in full every month and keep the use of your credit limits low (in other words, avoid maxing out your credit limits).
Big Bucks, Big Picture
A mortgage will be the largest sum of money most of us will ever receive. With that in mind, it is understandable that mortgage lenders are meticulous about details, details that we would find ridiculous. They want to look at your entire financial picture. Yes they want to see if you have a good credit score before lending you a dime. But as you can see they use a few additional factors when reviewing your entire financial picture. Before applying for your mortgage, think like a mortgage lender and review your own financial picture.