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The Elusive Mortgage: Why Is It Such a Challenge Getting a House Loan?

It’s always been said that it’s smarter to buy a house than rent one.

While owning a home is also pricey, the amount you pay in home loan payments could ring in close to your monthly rent. In some cases, it’s much lower. This is why many renters are looking into purchasing a home rather than renting one.

Here’s the catch: it’s becoming more difficult to get a mortgage. The qualifications are increasing, making it difficult even for those with good salaries and a high credit score.

Why is getting a mortgage so difficult? Read on to find out.

Many People Pay Late

Unfortunately, the bad eggs ruined it for the responsible ones. Many people pay their mortgage late. But how late is the question.

If you can’t get your payment out by the first, then don’t fret. Let’s say you make your payment on the fourth instead of the first. This isn’t a huge deal — you may not even get a late fee.

That’s because every mortgage payment has a grace period.

The grace period varies among lenders. Some lenders may not even offer a grace period. This is something to discuss with a lender before signing the contract.

When does missing a mortgage payment become an issue? In general, a penalty is assigned 15 days after the payment is due. The penalty is usually a late fee.

This isn’t even the worst part. The worst part is if you’re a whole month late. If this occurs, expect to be reported to the credit bureau.

And now we get to the point of this section — many people waited a month to pay their mortgage. So much so, lenders are forced to be picky about assigning mortgages.

There’s little you can do to prove to a lender that you will make your mortgage payment on time. As long as you make a good salary and have a good credit score, you should be in the clear.

The Debt-to-Income Ratio Is Decreasing

This next point has to do with the last point — the government is strict on the allowed debt-to-income ratio when accepting a mortgage. In the past, this number was at 70%. Today, the number is at 43%.

Why is this so severe? The government set this in place to prevent another housing crisis.

What does this mean for homeowners? Only a fraction of buyers can get a mortgage approval. Many homeowners are forced to either refinance their mortgage or accept a long-term mortgage term.

The best way to get approved for a mortgage is to not have any debt when you approach a lender. Make sure your car, student loan, credit cards, and other goods are all paid off.

You Need to Put a Large Sum of Money Down

Your lender expects at least 20% down on a mortgage. This is a figure not many homeowners can afford.

Let’s say you’re buying a home for $200,000. This is the average home price today. This means you need to pay $40,000 up front to qualify for a mortgage.

If you can’t provide the 20% down payment, what does this tell a lender? It means you can’t afford the house and, therefore, the mortgage.

What happens if you can’t pay the 20%? You have two options:

  • Find a cheaper home
  • Save more money

Unless you know you can provide the 20% down payment, continue renting and save until you can pay a 20% down payment.

There are other lending options as well like FHA and VA loans. These usually allow a much lower down payment. The downside is they require a mountain of paperwork that goes through a rigorous qualification process.

More People Are Defaulting on Their Mortgage

In 2011, 30% of homeowners defaulted on their mortgage. And this number doesn’t seem like it’s getting smaller. Unfortunately, this means every buyer is more of a risk than anticipated.

What happens when a borrower defaults? It’s bad news for the lenders. They lose money and have to minimize the number of borrowers they approve.

Why are all buyers suffering at past mortgage default rates? While you may have a great salary and credit score now, who knows if you will always be financially stable.

High Rent Prices Cause People to Buy (When They Also Can’t Afford It)

Rent prices are now increasing, making renting an apartment or other living space close to the cost of a mortgage payment.

Many homeowners see this as a justifiable reason to get a mortgage. Just because you can’t afford rent doesn’t mean you’ll be able to afford a mortgage.

Currently, 40 million Americans can’t afford housing. This is why rent prices are increasing – landlords and property managers know they can get away with increasing rent prices because it’s still a better option than owning a home.

The best option is to not buy a house unless you can afford it. Look beyond the mortgage payments.

Pay attention to repairs, replacements, and other services such as lawn care. You may have to rent a few more years to save money, but you’ll have the peace of mind knowing you can afford all payments.

Many Homeowners Are on the Blacklist

Because of the reasons stated above, many homeowners are on the mortgage blacklist.

If you went through a foreclosure or short-sale in the past, it becomes even more difficult to get a mortgage. This also means lenders are strict when accepting new mortgages.

Life is unpredictable. There are reasons you need to foreclose other than for financial reasons. But to prevent getting on the blacklist, prove to a lender you can afford your mortgage and stay true to the mortgage terms.

Lenders Are Also Thinking of Themselves

When you get a mortgage loan, you’re not going through a robot or automated chat. You’re going through another person, just like yourself.

This person has to make a living. They’re represented by a bank or financial center and the bank puts their trust in the lender that they won’t lose money on a borrower.

If they see a borrower with a low income, a bad credit score and can’t provide a 20% down payment, they see this borrower as a risk. And is taking that risk worth jeopardizing your career?

This is why lenders only approve borrowers who can prove they can afford their mortgage.

We’re Going Through a Housing Crisis

Today, owning a home is only for the rich and famous. That’s because of our housing crisis.

The sad part is, it’s not because of low wages or job loss. It’s because more people prefer to rent and rent prices are increasing. Unless you live in the suburbs, owning a home is becoming more expensive.

This is affecting lenders, who are becoming stricter when accepting borrowers.

What Can You Do to Improve Your Chances?

Just because there are many strict mortgage qualifications, doesn’t mean a mortgage approval isn’t possible. Read these tips and increases your chances of getting a mortgage.

Shop Around

Don’t settle for the first lender you find. Shop around and speak to different lenders. The best course of action is to receive as many offers as you can and take the one with the lowest rates.

Know Your Credit Score

One of the first pieces of information a lender will research is your credit score. Don’t wait until your consultation to know your credit score. Research your score to know which mortgage rates you can expect.

Many banks offer a free credit report service. There are also companies that offer a free credit report.

Save for Your Down Payment

The minimum you should pay is a 20% down payment.

But more lenders want to see down payments between 35% and 40%. Before even looking for a home, save for that down payment. You’ll have an easier time finding a mortgage and you’ll get one for the lowest rates.

What if you don’t have a lot of money saved? Settle for a cheaper home or buy a home off the grid.

Have All Required Documents Ready

All lenders are different, but most will ask for specific documents. These documents include:

  • Your pay stub
  • Tax forms
  • Credit history
  • Bank statements
  • Your ID
  • Renting and past mortgage history

If you can provide all of these documents immediately, you’ll have an easier time qualifying for a mortgage. This proves you’re a prompt and knowledgeable borrow, increasing the trust from a lender.

Pay Off All Debts

As mentioned previously, your lender will look at your debt-to-income ratio. While you should fit near the 43% required amount, it’s best if you have closer to 0% debt. This tells a lender there’s no other debt you need to worry about.

Getting a Mortgage Is Difficult, But Not Impossible

Do you dream of becoming a homeowner? Unfortunately, getting a mortgage is becoming difficult. Know what you need to do to get approved but also understand why mortgage acceptance is so strict today.

When you understand this vital knowledge, you’ll be closer to getting approved!

Would you like to know more about real estate? Click here to learn more about the 5 real estate trends that can impact your business.