Home ownership is a monumental life event and achievement. Mortgages can provide you a path to home ownership and likely will represent your most important debt. Banks and lenders make a significant committment to you by approving your mortgage application. What you make, where you get the money for a down payment, your debt and your track record of handling credit and paying debts determine whether and on what terms a mortgage provider will take the plunge with you. A mortgage application can suffer from poor, unstable work history, being over-extended on debt, borrowing money for down payments, judgments and bankruptcy.
Not Enough Income
You must make enough for a mortgage payment. Banks generally require that your housing expenses, consisting of principal, interest, taxes and insurance, not go above 26 percent to 28 percent of your monthly pre-tax income. If you make $2,500 per month before taxes, or $32,500 per year, your housing expenses must be $700 per month or less if the limit is 28 percent. For a mortgage backed by the Federal Housing Administration, the limit is 29 percent of your monthly before-tax income.
Too Much Debt
More pre-existing debt, such as credit cards, car loans and child support, means less money you have for your house payment. Keep existing debt, along with your projected mortgage payment, at or south of 36 percent of income. As illustrated by the Connecticut Department of Banking, if you make $4,167 per month, your mortgage payment plus existing debt must be $1,500 or less, based upon a 36 percent limit. You would qualify for a monthly mortgage payment of $800 if your pre-existing debt is $700. High debt also diminishes your credit score because high debt signals that you are close to your credit card limits and are relying too much on borrowed money.
No Steady Job History
Keep your job or line of work unless something else pays more. The Colorado Housing and Finance Authority tells its participating lenders to add points for applicants who stay at the same job or in the same line of work for at least five years. You lose points if you are in the same line less than two years. Job-hopping increases the risk that your money stream and your payments will be erratic, late or missing. While lenders cherish job stability, you will not automatically be turned away because your money comes from public assistance. According to the Federal Trade Commission, a lender may not deny you a loan simply because you get public assistance.
Source of Down Payment
Mortgage programs do not allow you to make down payments with other people's money, such as loans, or money from a real estate broker or the seller. The Federal National Mortgage Association (FannieMae) does not consider loans from family, relatives, a spouse or fiance as acceptable down payment sources. The Federal Housing Administration lets you use your own earnings, funds from selling your property and gifts from family, your job, your labor union, a charity or government agency. If your employer kicks in the down payment, it must directly pay the down payment or channel it through its connected credit union, if there is one. If your checking or savings account balloons suddenly, the lender will look to see whether you got the money from a loan, credit card advance or prohibited gift.
Judgments and Other Liens
A judgment is a court's way of saying you owe money. Judgments tell lenders that you have not or cannot pay your debts. More importantly, a creditor holding a judgment gets paid before a later mortgage if the property involved gets sold. Lenders want any judgments or other liens, such as for taxes or other mortgages, to be paid before they will approve your mortgage.
Bankruptcy may sometimes derail a mortgage application. Loan programs normally make bankruptcy filers wait two years after the case is over to apply for a loan. For loans backed by the Federal Housing Administration, the wait is two years after discharge if you file a Chapter 7 Bankruptcy (liquidation) or one year after your first payment in a Chapter 13 wage-earner plan. Bankruptcies also diminish your credit history. A bankruptcy can stay on your credit report for up to 10 years. A bankruptcy will have less impact on a mortgage if you rebuild credit over time. Fair Isaac Corporation (FICO), which calculates credit scores, suggests that you start rebuilding with a secured credit card, in which a bank account or a car sets your spending limit and guarantees that you will make your payments.
- Federal Trade Commission: Comments: Letter from Mortgage Bankers Association; July 16, 2004
- Financial Crisis Inquiry Commission: How to Buy a Home with a Low Down Payment 3% or Less
- Connecticut Department of Banking: What to Know When Shopping for a Mortgage to Purchase a Home
- Federal Housing Finance Administration: Mortgage Market Note 11-02: Qualified Residential Mortgages
- United States Department of Housing and Urban Development: Chapter 2: Mortgage Development
- MyFico: Credit Education: How Long Will Bankruptcy Hurt My FICO Score?
- Freddie Mac: Your Step-by-Step Mortgage Guide: From Application to Closing
- Freddie Mac: Loan Prospector Documentation Matrix
- Los Angeles Valley College: Job Training: HUD4155.1: Borrower Funds to Close
- United States Department of Housing and Urban Development: Energy Efficient Mortgage Homeowner Guide
- FreddieMac: Documenting Acceptable Sources of Income; October 2011
- Ginnie Mae: Your Path to Home Ownership: How Much Home Can You Afford?
- Federal Trade Commission: FTC Facts for Consumers: Mortgage Discrimination
- Department of Justice: United States Trustee: Making Home Affordable Program and Home Affordable Modification Program: Frequently Asked Questions for Bankruptcy Filers
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.