How Your Financial History Affects Purchasing a Home
If you’re a potential homebuyer, you’re most likely applying for a home mortgage. A mortgage is a loan you use to purchase a property that you repay (with interest) over time. A loan provider may seize the house if you fail to pay your loan. Many things factor into whether or not you can obtain a mortgage. A loan provider could reject your application for many reasons, including:
Any potential lenders will run a credit check. You will need their minimum credit score, which can change depending on how much money you plan on your down payment. The higher your credit score is, the better. Different lenders may require varying credit scores, but you may have a higher interest rate if your credit score is lower.
Being late (more than 90 days) on a payment makes your credit score lower. Make sure you are at least making the minimum payment on your credit cards or other loans (like a personal loan or a student loan) that you may have.
Don’t open too many accounts at once. It may seem tempting at stores that offer a line of credit for their goods! However, opening too many credit accounts can lower your credit rating. It also shows lenders that you rely too heavily on credit. Only open a new account every so often to show that you’re not an irresponsible borrower.
Black marks in your credit history are an immediate red flag to lenders. It shows that you missed a payment. It may also signify other things like bankruptcy, prior foreclosure, collections, or civil judgment (ruling against you in court that requires you to pay for damages).
As long as you make your minimum payment, you should be able to avoid black marks on your credit history. Set a reminder, so you know to make your payments on time. Consider talking with your bank about scheduling recurring payments, so you don’t have to worry about missing a deadline!
Loan providers will check your debt-to-income ratio to ensure you’ll be able to pay your monthly mortgage payment. What’s a debt-to-income ratio? Divide your debt (monthly payments) by your total monthly income. There are two different types of DTI: front-end and back-end.
Front-end factors in your total housing cost and divides it by your monthly income. The back end takes all your monthly payments and divides them by your monthly income. Many home mortgage lenders want your front-end income ratio to be less than 28% and your back-end income ratio to be less than 36%. It tells them whether or not you are smart with your money! Spending too much money is a red flag to home lenders, and lenders may think you won’t be able to make your monthly payment.
If you think you may not qualify for a home loan, consider improving your credit score. Even if you qualify for one loan, it may be better to wait a year or two and raise your credit score, so you can have more options with lower interest rates. Waiting may seem like a waste of time, but it may save you a lot of money in the long run!