For many people, especially first-time homebuyers, the home loan process can seem quite daunting when looking in from the outside. You may be wondering, “What information will the lender need? How will we know how much home we can afford? How do we even get started?” All these questions are extremely common and should be addressed very early on in the home loan process. As for how to begin, the very first step for anyone who is looking to buy a home is to get pre-approved with your lender.
During the pre-approval process, your loan officer will ask you to complete an online mortgage application. Additionally, your loan officer will ask you to provide employment history, financial information such as bank statements and paystubs, and your desired down payment amount. This information will be used to determine your debt-to-income ratio, and the mortgage programs and interest rates that may be available to you.
Besides all the number crunching, your loan officer will also explain the basics of the home financing process and set proper expectations and timelines. You should receive a pre-approval letter within two business days, along with additional information about your next steps.
But what happens if you don’t get pre-approved for a loan based on one or more factors? Don’t stress, it doesn’t mean you have to give up on your home financing goals. You may just need to correct any problem areas as indicated by your loan officer.
The following are the most common reasons a borrower isn’t pre-approved right away along with details on how to correct the deficiencies to prepare for when you reapply later.
Credit Issues
As with any type of loan, your lender wants to be sure that you are a reasonable business risk, which is why a review of your credit score and credit history is an essential part of the pre-approval analysis. A low credit score can be the result of several factors, including late credit card payments, the recent opening of multiple credit accounts, or an excessively high debt balance. You can improve your credit picture to help ensure a successful future pre-approval by:
- Checking with credit card companies if you believe specific late payment notifications are incorrect.
- Making loan and credit card payments on time.
- Reducing the balance of your total outstanding debt, including revolving credit card accounts.
- Not applying for new credit cards.
- Avoid canceling unused credit accounts. Any debt that you’ve paid off on time is a positive sign on your overall credit score.
You should also avoid “quick fix” credit repair scams. If you feel additional support is necessary, it might be wise to contact a reputable credit counselor for advice. Your loan officer may have a referral for you.
If you’d like a reference sheet to keep handy or hang on the fridge as a reminder, download our Credit Do’s and Don’ts flyer here.
Debt-to-Income Ratio
The debt-to-income ratio (DTI) is a critical part of a borrower’s full credit analysis. The DTI compares your monthly debt payment to your monthly gross income. An exceptionally high ratio is a concern because it means you might have difficulty paying your monthly credit card bills, along with your monthly mortgage payment. A lower ratio indicates that you are effective at managing your finances and better able to meet all financial obligations on time.
One “simple” solution to a high DTI is to pay down more of your recurring credit balances, thus reducing the ratio.
Of course, an increase in monthly income from a promotion or other source will also help reduce an overly high DTI, although this might be harder to come by quickly.
Employment History
The ability to repay your loan largely depends on your monthly income, so stable employment history is a primary consideration for pre-approval. An uneven employment record could be another reason for not qualifying.
A general guideline is that you must be employed for at least two years, although not necessarily with the same employer. Supplying a pay stub showing year-to-date income as well as W-2 forms covering two years of employment is proof of your work record.
You may be able to show how extenuating circumstances created a brief employment gap. Otherwise, the obvious way to alleviate a significant deficiency is to continue employment for the desired time and then reapply for your loan.
Cash Reserves
Not being able to make the down payment required for your new home could be a negative factor in your pre-approval.
If you lack this cash reserve, you could continue saving and then reapply once you’ve saved the required down payment amount or consider down payment assistance options.
As an alternative option, you may be able to use “gift money” toward the down payment. Your loan officer can review any relevant gift money guidelines with you if you choose to go this route.
It’s important to remember that not getting pre-approved for a home loan is usually just a temporary stop on your path to homeownership. It may take a little longer to realize your goal, but you can be successful with patience and extra effort. Our OneTrust Home Loans loan officers are committed to working with you to make the home loan experience as efficient and hassle-free an experience as possible. If you’re ready to begin pursuing your home financing dreams, get started today.