I’ve talked before about how we are saving money for a house by living with my mom and step-dad. I even gave you some tips for if you are living with parents to save money for a house. Today, I’d like to share some lessons I’ve learned about qualifying for a mortgage. Some of these you may already know, but as a first time homebuyer, I had no idea just how difficult it would be to qualify for a mortgage.
Thankfully, we have a good little nest egg so we are currently only looking at homes we can buy cash in hand (which means we are competing with investors who steal everything we love). But we recently looked into getting pre-approved for a modest mortgage only to find out it’s more difficult than it looks.
1. You can’t qualify for a mortgage with bad credit, no matter what.
In order to qualify for a mortgage, your credit score (and the credit scores of everyone else whose income will count towards your approval) MUST be above a 620. So if your spouse has bad credit and an awesome job, you better start working on his or her credit so you can count that income. Otherwise, their income cannot count towards your approval. There are no exceptions to this rule – even if the credit is bad because of medical debt. Hopefully, in the future, medical debt will be treated differently than consumer debt, but for now, if your spouse has unpaid medical bills in collections, it isn’t counted any differently than someone who has tons of unpaid credit cards in collections.
2. If you are self-employed, your income probably doesn’t count.
The only way that self-employed income counts is by producing tax documents for the past two years that prove you have had a similar level of self-employment income for that amount of time. If you are newly self-employed or just haven’t made enough to pay taxes in the past but have seen a recent jump in income (common in bloggers), your income won’t count. Similarly, if you are a nanny or are paid under the table (which I don’t recommend), you don’t pay taxes on your income so it doesn’t count.
3. Your income/debt ratio has to be below 40%.
If you already have a car payment and student loans, it’s possible you don’t qualify for a mortgage. If you bring home $3000 per month, you can only carry $1200 in monthly debt payments. So if you pay $500 in car payments and $700 in student loans, you can afford a mortgage of $0. No house for you (unless you pay with cash).
4. Getting a co-signer may not help you.
This is where things get incredibly
stupid confusing. We recently talked to a bank to try to get pre-approved for a mortgage that would be in my name with my mother as a co-signer. We did this because my husband’s credit isn’t quite good enough for a mortgage yet and my self-employed income doesn’t count. So we needed someone with good credit and verifiable income to co-sign, and my mom offered. When the bank ran the numbers, they explained that my student loan payments would be factored into her debt/income ratio (which pushed her just over 40%). So basically, if she wanted to purchase the house on her own, she would qualify for a mortgage. But if she co-signed with me (someone who is working from home, has only student loan debt, and has a husband making more than enough money to cover the mortgage and then some), she “couldn’t afford it.”
5. If you are purchasing with someone, your good doesn’t cancel out their bad.
You’ve probably already noticed this trend, but if you are purchasing a home with someone (spouse, co-signer, whatever), your good (or their good) doesn’t cancel out their bad (or your bad). If any person on the application has a credit score below 620, you don’t qualify for a mortgage. Everybody’s debts count, but only certain types of income count. You may be able to afford a house, but it doesn’t mean you qualify for a mortgage.
6. Having a large down-payment will not gloss over any of the above issues.
My husband and I are looking at very affordable houses. The loan we just tried to get would have been for a $47,000 home, and we were willing to put $25,000 down on it. The home appraises for over $70,000. On paper, it looked like a no-brainer to me. Even if we never paid anything on the mortgage and the house went into foreclosure, the bank would walk away with a house worth $70,000 for a total loan cost of $22,000. Even in that situation, they would walk away from the deal ahead financially – by thousands of dollars. But it doesn’t matter. The bank’s hands are tied by very rigid and specific mortgage rules. Even if you have a substantial down-payment, they have to abide by those rules.
If you or your spouse have bad credit, little savings, are self-employed, or don’t have a good job, it can be a struggle to realize your dreams of homeownership. But don’t give up. Start repairing and building your credit score today. Stop spending money needlessly. And realize that being self-employed means your income doesn’t count for two years. Knowing what you’re up against is the first step towards meeting your goal. I hope that you can find (and afford) the house of your dreams. And I’ll be sure to update you when we find ours.
What else should first time homebuyers know when they start looking? Share in the comments below.
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