How to Get a Mortgage Following Financial Hardship

How to Get a Mortgage Following Financial Hardship

In a recent survey, consumers revealed a startling assumption: nearly everyone said they thought they needed at least a 16% down payment to buy a home. Since 39% of potential home buyers said they could not afford a down payment of even 5%, many consumers believe they have been priced out of the market and would be unable to ever qualify for a mortgage.

While there are programs available to educate consumers and, in some cases, provide down payment assistance to potential buyers, the truth is that borrowers often fail to qualify for a mortgage for another reason: financial hardship.

The Factors Lenders Evaluate When Approving a Mortgage

In addition to your ability to cover the minimum down payment,  your lender will also evaluate your credit score, income, and current debt to determine if you qualify for a mortgage:

1. Your Credit Score
   Your credit score is a three-digit number that tells a lender how likely you are to pay your credit obligations as agreed. It is based on many factors related to your financial history, including how much debt you owe, how much credit is available to you and your history of paying off past debt.
   

   A good credit score, which is typically 690 or higher, can help you acquire a more competitive rate on your mortgage. However, a lower credit score may indicate that improvements for how you manage your credit are needed and it could put you out of the home buying market—at least temporarily. Fortunately, there are things borrowers can do to repair their credit, which we’ll discuss in a minute.

2. Income
   When evaluating your application for a mortgage, your lender will also review your income relative to any debt you currently owe.
   
   Typically, a two-year history of steady employment is required to qualify for a loan. However, there are exceptions to this rule:
   
   First, if you’ve recently graduated from college, those years spent gaining an education don’t necessarily represent an employment gap. If you have a current job or an offer letter from a company, your lender may be able to overlook a lack of employment history.
   
   Second, if you have been unable to work due to a lengthy illness or disability, your lender may be able to waive the need for a recent two-year history of work. In this case, you’ll need to provide proof of illness as well as proof that you were gainfully employed before the disability took hold.
   
   
3. Debt
   Once your lender has evaluated your income, they’ll also look at your debt. You’ll need to demonstrate that you are able to fulfill your current credit obligations, as well as the cost of the proposed monthly mortgage payment. To determine this, your debt-to-income (DTI) ratio is calculated. DTI is a measurement that compares your monthly debt payments to your gross monthly income. In general, your DTI should be around 45%, or lower, depending on the type of mortgage loan for which you will apply.

What to Do if You Don’t Qualify for a Mortgage Today

Be patient. If you’re denied a mortgage due to past financial hardships, how you proceed will depend on the reason your mortgage wasn’t approved. In most situations, time, and intentional efforts to improve your credit score, lower your debt and validate your income and/or employment history can put you back on the road toward homeownership, despite financial hardships.

A low credit score, for instance, can be improved by paying down current debt and making timely payments. Just keep in mind that it can take time for these actions to be reflected in your credit score.

In cases where you owe too much or past debt had been sent through a collections process, you may benefit from working with a debt consolidation company. Organizations like these will negotiate on your behalf to consolidate your obligations and reduce the amount you owe or pay over time. Before taking these actions, however, you need to be committed to paying off your outstanding debt according to the agreed upon schedule.

If you’ve experienced a foreclosure, short sale or bankruptcy, time may be your best friend. By paying off new liabilities according to schedule and keeping credit balances low, you could re-establish a solid credit history within a year or two.

And finally, borrowers who are unable to save enough for a down payment may be eligible for financial assistance. Programs are available at the state or local level, and they are designed to help eligible buyers obtain some or all of the down payment required to get into a home.

In all previously mentioned cases, talking to a qualified loan officer is the best place to start. A loan officer can walk you through your application and explain the findings. If you’ve failed to qualify, a skilled lender will isolate the reason and can help you create a plan to address the problem. It may take time, but with a qualified loan officer on your side, a solid plan in place, and the commitment to make financial changes in your life, if your dream is to own a home one day, you can get there!