You've found your dream home, filled out your mortgage loan application and sent it off to your lender. Now you'll wait, hopeful that your lender will not only approve your application but assign you a low interest rate to make your loan more affordable.
It's natural to be nervous during this time. You're unsure of what lenders will be looking for and what financial factors might cause them to hesitate in giving you mortgage money.
Here are four warning signs that you should look for when applying for a loan. If you recognize any of these potential trouble spots, your mortgage loan application might be on shaky ground. You might have to resolve these financial issues before you can qualify for a mortgage loan at an affordable interest rate.
1. Too much debt.
Your debt-to-income ratio is a key number when applying for a mortgage. You want your monthly debts, including your estimated new mortgage payments, to equal no more than 43% of your gross monthly income. If your debt-to-income ratio is higher than this, your lender might not approve your application. You'll need to either boost your monthly income or—perhaps more realistically—reduce your monthly debt obligations.
2. A low credit score
Before you apply for a loan, you should order your credit score from either of the three national credit bureaus: Equifax, Experian or TransUnion. Your credit-card provider might also report your credit score on your monthly statements. The scores maintained by these bureaus might vary slightly, but they'll be close enough so that you can get a general idea of how strong your credit scores are. Lenders reserve their lowest interest rates for borrowers with FICO scores of 740 or higher. If your score is under 640, you might struggle to qualify for a loan and you'll certainly pay a higher interest rate. If your score is lower, a smart move might be to hold off on applying for a loan until you can pay off more of your credit-card debt and make enough on-time bill payments to boost your FICO score.
3. You're a job hopper
In general, lenders prefer borrowers who have worked with the same company or in the same field for at least two years. This way, lenders reason, you'll be less likely to suddenly lose your job, and your ability to pay your mortgage loan. A history of short stays at a number of employers might make lenders nervous. This isn't usually a deal breaker, but you might have to do some explaining to convince your lender that your monthly income stream isn't going to disappear anytime soon.
4. You have big deposits that you can't document
That $10,000 that you suddenly deposited into your savings account days before your loan application might look great to you, but it could make lenders nervous. They want to make sure that your finances are strong on their own, and that you can document from where any big deposits came. If that $10,000 is a gift from your parents, for instance, you'll need to document it with a gift letter stating that you won't have to repay the funds. If you do have to repay your parents' $10,000? Then lenders will count that money as debt, which could make it more difficult for you to qualify for your loan. Make sure, then, that you have a paper trail showing the source of your big deposits, whether they are gifts, bonuses from your employer, transfers from other accounts or a large commission check.