While having a new addition in the family is reason to spend more money, a baby shouldn’t hurt your chances for getting a home loan. If your mortgage application is denied, there may be a problem with your credit, your debt-to-income ratio may be too high or the property appraisal came in too low. These are among the prime factors that lenders consider when you apply for a mortgage.
The higher your credit score, the less interest you’ll pay on a mortgage loan. This is good news when every dollar you save on household expenses can help pay for diapers, formula and all the other stuff a baby needs. Qualifying for a lower mortgage rate will lower your monthly mortgage payment, leaving more money in your pocket for these other essentials. In fact, one percentage point can lower your monthly mortgage payment by at least 10 percent.
Income vs. Expenses
Even if your credit report is squeaky clean, a lender may still deny you for a mortgage loan if you spend almost as much as you earn each month. Lenders like it when you leave yourself plenty of wiggle room. In the world of mortgage financing, your debt-to-income ratio -- how much of your income you use to pay your bills -- is a number that’s just as important as your credit score. (See Reference 3) Lenders look at both the front-end and back-end ratios. The front-end ratio is how much of your monthly income before taxes you use to pay your housing expenses. The back-end ratio looks at how much of your income you use to pay your housing expenses plus all the other debts you owe each month.
In addition to how much income you earn, a lender will look at your employment history. Not all lenders have the same requirements when it comes to how they look at job changes, but most look to see if you’ve been at your current job for at least the last two years. If you’ve changed jobs recently but within the same field, it might not be a problem. A potential lender will want to know that you work a stable job that pays you enough so that you can afford your monthly mortgage payment. Job stability is likely to become more important on your own list of priorities once you have a family to support.
While having a baby may affect the size of the home you want to buy, a low property appraisal is what could put the kibosh on you not getting the home of your dreams. Lenders use appraisals to find out if a home is worth at least as much as you want to borrow. A lender may take a tougher stand on the appraisal if your debt-to-income ratio is high or your credit score is a bit low. As a rule, the appraiser must show how much three comparable homes in the same area have recently sold for. The appraisal may become a problem if few homes have recently sold in that neighborhood and the appraiser has to compare it to a home outside the surrounding area.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.