You have a down payment saved up, a good credit score, and a low debt to income ratio. It is time to buy your dream home. However, something prevents you from buying the home. What can stop you from buying a house? In this article we will explore some common obstacles and how you can overcome them.
Recent Income or Job Changes
If you have recently changed jobs, it can be difficult — but not impossible — to buy a home. Especially if your new job lowers your income or if you are changing fields. Or if you have just switched to a commission-based job and you do not have a history in such a role. It is recommended to wait to switch jobs until after you close the sale on the house to avoid this problem. However, if you are moving because of a new job that can be an acceptable reason for changing jobs while house hunting. As long as the income is in the same range as your old job.
Having a Gap in Employment
Another part of your income they will look at is if you have been unemployed for six months or longer in the last year. A six-month gap is a possible red flag for a lender unless you have a clear reason for the job gap. The reasons can include a family illness, maternity leave, or possibly being unable to find work in your field because of the COVID-19 pandemic.
Income is Not Straightforward
Another obstacle with your income is if it is not straightforward. This can be the case when someone has hourly employment. A mortgage lender will have to take the average of your hourly income over the last 2 full years. If you frequently work overtime, you will also need a two-year average on the overtime for it to be factored into that average. And if the income is declining or increasing year over year is important.
Working multiple hourly jobs will also complicate matters. You will also need a two-year average for each job to be factored in.
If you work for your family’s business, they will determine your income based on your tax returns for the last two years.
Be upfront and honest about your income with your lender. This can help them get a better idea of your income and if you will better be able to secure a loan to buy a home
Your Credit Score
A common misconception with credit scores is that you only have one. There are, in fact, three credit bureaus. And they each have different credit scores for a each person. The credit bureaus are Equifax, Experian, and TransUnion. A mortgage lender will look up all three of them and use the score in the middle. Another problem with credit is that it changes often. You might have 750 today, but next week it could be down to 730.
This can be due to credit card balances changing, or a sudden blemish appearing on your credit report.
While having a credit card is a good way to help you build up your credit score, it is a common misconception that keeping a balance on your credit card will help your credit score. It can hurt your credit score to keep a high balance on your card. A low balance would not be a problem. Even if your debt-to-income ratio is good, if you have a huge credit card balance, it can lower your credit score. The way to overcome this obstacle is to pay down the balance of the credit cards before you start looking for a home.
Another way that debt can stop you from buying a house is if you have new debt. For example, if you decide to buy a new car while you are looking for a new home, and you take out a loan to buy the car. It can change whether or not you qualify for the mortgage loan. Therefore, when you plan to buy a new house, it is best to avoid taking out any type of loan or racking up any large credit card debt.
Having a Small Down Payment
While there are some loan programs that allow a low down payment on a home, it is still a good idea to save up as much as you can before you try to buy a home. This will help to have a lower mortgage, or with closing costs, or simply for cash reserves. Get pre-approved first to ensure you are looking at homes that you have a down payment large enough to secure the home.
To contact me to discuss your mortgage scenario, mortgage rates, or other mortgage questions, click here to schedule a call or you can email me directly.