Two things can make a big difference in your ability to get a home loan: credit scores and proof of income.
Actually, there are a lot of things that impact your eligibility for a mortgage — like income and debt — but it seems credit scores and proof of income have caused some aspiring homeowners more trouble than most. The latest Market Pulse report from CoreLogic says that borrowers with poor credit and limited documentation of their income and assets have found it much harder to get loans when compared with other mortgage originations following the housing bubble.
“Underwriting eligibility in the current market requires borrowers to possess good credit and the ability to document their loans fully,” the report said. The report looks at first mortgages originated in October 2013 and uses pre-2004 origination figures as the “normal” benchmark.
A Lopsided Rebound
For example: In 2003, 29% of first mortgages (the loan borrowers take out when purchasing a property) were given to consumers with FICO scores below 620. In October 2013, 0.3% of loans went to borrowers with such scores. Like applicants with low credit scores, those who can’t sufficiently document their assets are seen as higher-risk borrowers, and the market has a decreased appetite for such consumers.
Comparatively, other high-risk loans are hovering near pre-housing-boom levels, according to the report. This includes high loan-to-value mortgages (when the loan is more than 90% of the home’s value), loans to borrowers with a high debt-to-income ratio (when the borrower’s debt makes up more than 40% of their income) and purchase-money loans (aka seller-financed mortgages).
Lowering Your Risk
The good thing about credit scores is that they can be improved, but it takes time. And for someone with intermittent or difficult-to-track income, gathering the documentation required by mortgage lenders can be a tricky task. For these and many other reasons, it’s smart to start preparing to buy a home well in advance of the time you apply for a mortgage.
Once you start thinking about house hunting, you’ll want to check your credit reports and credit scores, since negative entries on your credit reports may hurt your chances of getting approved for a mortgage. Inaccuracies on credit reports are more common than you may think, which is why it’s a good idea to review your reports as often as you can. (Everyone is entitled to free annual copies of their credit reports from each of the three major credit reporting agencies.)
Checking your credit scores is easy and helpful, too. There are plenty of free tools available to assess your credit risk, like Credit.com’s Credit Report Card. If you see a score lower than you’d like, it’s an indication you need to change some of your credit behaviors. That could mean reducing your debt load, making your bill payments on time or restricting how often you apply for new credit. The Credit Report Card breaks down the five factors that determine your credit score and allows you to see which areas require your attention. Whenever you’re checking credit scores, make sure you’re comparing the same model from month to month (or however often you can check them), because there are scores of different models, and you can only accurately gauge changes by periodically looking at the same score.
Keep in mind that if you wait to check your scores until right before applying for a mortgage, and you don’t like what you see, you likely won’t have time to change it. This is why it’s helpful to start early. Also, knowing ahead of time what you’ll need to present a lender when applying for a mortgage will give you a head start on collecting the paperwork you need to prove you’re a worthy borrower.
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