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. When you are trying to get a home loan, a lender will look at your income for the last two years, and if you have a new job, that can hurt this evaluation. This is especially true 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 two years. Lenders want to see that you have been continuously employed for the last two years, and a six-month gap is a 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. You need documentation of the circumstances, and there are no guarantees that your loan will get approved.
Income is Not Straightforward
Another obstacle with your income is if it is not straightforward, which is often 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, which might make it look like you make less money on paper than you actually currently do.. If you frequently work overtime, you will also need a two-year average on the overtime for it to be factored into that average.
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 that 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 to decide if they should lend to you. Another problem with credit is that it changes often. You might have 750 today, but next week it could be down to 720.
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. This has the opposite effect — it can hurt your credit score to keep a balance on your card, especially if you have a high balance on it. 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 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 for a lower mortgage, for 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.
It is tricky to determine how much you will need for a down payment since it depends on the house you decide on and the mortgage loan you are able to secure. It can take a few years to save up a down payment, which means that mortgage rates might be higher by the time you can afford the down payment on a home.