Most people will tell you that acquiring a mortgage can be a lengthy, complicated process. Throw into the mix a few credit blemishes or a heavy debt burden, and the path to homeownership can suddenly become an uphill battle.
Before you pick out your dream home and start mentally placing your furniture, it’s important to know if your financial situation will make potential lenders deem you a high-risk borrower. Lenders use a variety of methods to ensure customers won’t bail on their loans. For example, Tammi Robson, a mortgage broker at Metro Lenders Inc., determines loan eligibility for Denver, CO, house hunters by using a three-pronged approach. “Approval of a real estate transaction depends on the approval of three things: the borrower’s credit, the borrower’s income, and the house itself,” she says. “The borrower’s credit must meet minimum guidelines; their income must support their ability to repay the mortgage; and the house they want to buy or refinance must appraise for the amount needed.”
However, even if lenders flag you as a risky borrower, you don’t have to resign yourself to being a lifetime renter. Here are four scenarios that can cause lenders to consider you a high-risk borrower — along with steps you can take to improve your situation and increase your likelihood of being approved for a loan.
When guiding clients through acquiring a loan, Robson suggests a laundry list of tasks they should tackle or monitor. Among the top items on that list are acquiring a credit report, working to pay down debt and bring all accounts into good standing, and either securing funds for a down payment or searching for homes that allow 100% financing. In addition, she suggests avoiding large purchases — such as a car — prior to or at any point during the loan-approval process. “Many borrowers ask me what is the maximum they can buy that won’t affect their loan qualification,” says Robson. “I tell them $30. If it costs more than $30, don’t buy it!”