5 Things That Can Sink a Mortgage Application
A low credit score and lack of income aren't the only things that can keep you from qualifying for a mortgage. Here are five other things that can sink you as well.
Are you getting a divorce?
A divorce proceedings in the works won't automatically disqualify you from obtaining a mortgage or refinancing, but it can make the picture more complicated. Basically, the lender doesn't want to get left high and dry in a battle over marital property, or refinance a mortgage when one of the two earners will no longer be contributing to the monthly payments.
In fact, people often refinance a mortgage as part of the divorce process as a way of getting one partner's name off the loan. To do this, however, you have to be in agreement as to who's going to get the house and the other party needs to be willing to sign off on the deal.
Don't even try to omit the fact you've in a divorce proceeding or simply "neglect" to include it - if your lender finds out, which it probably will during the background check, you'll be turned down for sure. You could also be charged with mortgage fraud for intentionally lying on a mortgage application.
Did you change jobs recently?
Lenders like to see evidence of a stable employment history before approving you for a mortgage. Typically, that means you should have been in your current job for at least two years before applying for a mortgage or mortgage refinance.
That's not a hard and fast rule. If you've recently taken a new job in the same field at higher pay, it probably won't hurt you. However, if you're venturing out in a new career direction - even if you're earning more - lenders are likely to be reluctant until you've established yourself. And if you're starting a new business, it's going to take even longer before lenders will be assured you've got a reliable income.
Under no circumstances should you change jobs during the loan application process - sit tight until after the mortgage closes, or you'll have to start all over again. And if you've been unemployed for any reason, you'll probably have to be in a new job for two years before mortgage lenders will be willing to consider you again.
Are you in a lawsuit?
Being a party to a lawsuit makes lenders nervous. If you're being sued, there's the chance you may get stuck with a large settlement that may make it difficult to meet your monthly mortgage payments. If you're suing someone and lose, you could be end up with some hefty attorney bills, not to mention the chance of a countersuit.
Being a potential beneficiary of a class-action lawsuit doesn't count. To be involved in a suit, you either have to have filed a suit against someone in court, been served as a defendant or have hired an attorney to represent you.
Your mortgage application will ask if you're involved in a lawsuit of any kind. Again, you have to answer truthfully - this is another situation where you could end up getting charged with mortgage fraud if you misrepresent the facts on your mortgage application.
Are you making major repairs?
When you're in the midst of major renovations or home repairs is not a good time to try to refinance. While repairs and upgrades can enhance the value of your home, the same work left unfinished will diminish it. Given that completion dates for home improvement projects can be a moving target, lenders will prefer to see the work completed before signing off on a new mortgage.
Some people may seek a cash-out refinance or home equity loan if they find themselves running out of money in a home improvement project they intended to fund by other means. But unless you've got a lot of equity already tied up in the home, you're probably better off seeking to refinance or take out a home equity loan before starting the project.
You recently took on new debt obligations
One of the last things you want to do before applying for a mortgage or mortgage refinance is to take on a big pile of new debt right before doing so. The classic example of this is buying a car - driving up your debt-to-income ratio right before seeking a new mortgage.
Lenders typically want to see your total debt payments be no more than 43 percent of your monthly income, with the mortgage no more than 31 percent. A new car is one major purchase that will sharply drive up your debt load, as will other large purchases - it's probably best to wait to buy new furniture and carpet until after you've secured the mortgage or refinance.
Also, be careful about other ways of incurring debt obligations - if you're co-signing a loan for an adult child to buy a car, for example, that debt registers against your credit, even if you're not the one who'll be making the payments. If the primary borrower defaults, you'll be the one they come to next, and your mortgage lender takes that into account when figuring your debt load.