Mortgage loans are critical for anyone looking to get on the property ladder. It’s no secret that real estate investments are incredibly fruitful and can help you form your own mini-empire. If you buy a house, you can turn it into a rental property that generates passive income every month. But, to do this, you will need a mortgage.
This will mean applying for the loan – usually via a bank, but some other accredited mortgage lenders do exist. Naturally, you may have applied for other loans or credit at different points in your life. Everything has been approved without any hitches, but a mortgage loan is not the same. These loans are massive and require lots of commitment. Lenders can’t afford to hand them out to anybody, so they ensure borrowers meet very strict criteria to be approved.
Consequently, there’s a whole list of things that can prevent you from getting a home loan. Here are some of the most common reasons you might struggle, along with advice on how to deal with the issues:
A Bad or Non-Existent Credit Score
Credit checks are always run whenever you apply for loans. If you’ve had loans in the past, that doesn’t mean your credit score is necessarily good enough to get a mortgage. Generally speaking, you should aim for a FICO credit score between 580-620 as the bare minimum. There are plenty of places you can go to check your credit score and see where it currently stands.
You may have a score that’s way worse than what’s required – or you might not have one at all. In both cases, there are things you can do to build credit and boost your score. Obvious ideas include paying bills on time, setting up a credit card to repay the bill in full every month, clearing as much debt as possible, and removing any false information from your credit report.
A Poor Income/Expenses Ratio
Your ratio of income to expenses will look at how much money you have coming in, compared to what leaves your accounts every month. Even with an excellent credit score, lenders might reject your mortgage application because you have too many expenses for your income to handle. You’re barely left with money after paying your bills and going through your normal monthly expenses. From their perspective, how can you add mortgage repayments on top of this?
The solution to this is as simple as finding ways to reduce your expenses. Save money on household bills wherever you can, switch to cheaper grocery shopping, and avoid recklessly spending your money. You could also try to increase your income if you have the time and energy.
A Criminal Record
Many lenders may run criminal background checks on borrowers applying for mortgages. If you’ve got a charge on your criminal record – even if you didn’t end up serving it – this could be enough to lead to application rejection. It’s simply a case of the lender being overly cautious and seeing you as a slight risk. Is it unfair? Of course, but there are no laws stopping them from doing this. You may have made one small mistake when you were younger, but it’s come back to bite you now.
Two things can be done to deal with this issue. The first is to hope that the rest of your application and your life after the criminal charge proves that you are a responsible lender. Alternatively, you could look into record expungement services that will basically help you clear your criminal record. This is a great idea if the charge was many years ago and is no longer relevant.
A Small Downpayment
You will require a downpayment for a mortgage, which will be a percentage of the house value. In general, you need a downpayment of at least 5% to be considered for a mortgage. If you’re unable to raise this amount of money during your application, the lender is probably going to reject you. Why? Because they’re not getting enough cash up front, meaning they’d have to hand out a bigger loan that they’re uncomfortable with.
Again, much like the income/expenses point, the solution is straightforward. Work on ways to save as much money as possible to raise the funds for your downpayment. If you are desperate to get on the property ladder as soon as you can, aim for a 5% deposit. But, if you’re willing to be patient, trying to get a larger downpayment will help you apply for a smaller mortgage that’s easier to repay.
In short, don’t let these four common issues come in the way of your real estate ambitions. Check your application before you send it off, ensuring that you’ve dealt with these problems. As such, you’ll be in a much better position to gain approval!