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March 11, 2015
A home, the symbol of the American Dream, is what most people strive to own one day. In fact, a home, is the single largest source of wealth for the average American. Owning a home is generally cheaper in the long run than renting and over time almost always increases in value. If you have ever been denied for a mortgage an unable to get a home then you know it can be incredibly frustrating and depressing. So what are some factors that can be stopping you from home ownership?
This is number one reason people are getting denied for a home loan. Having a great credit score is very important and even more so since the housing crash of 2008. Long gone are the days of the “sub-prime” mortgages where lenders would help in those with credit scores in the 500s. Now to qualify for a home you need a credit score around 640 or above. To have a decent a credit it means you must have a history of paying your bills on time and a favorable credit utilization ratio. Credit utilization ratio is simply your available credit and how much of that credit you are using. An acceptable ratio is below 30%. If you have a poor credit score you may need the help of a credit repair company to see if there are any inaccuracies on your reports that can be removed to increase your score quickly.
Your Debt To Income Ratio
One major reason people will be turned down for a home loan is having a poor Debt To Income ratio or DTI. Let’s say you take home $3,000 a month and have $500 in credit card payments, $500, in car payments, $400 in student loans, and $400 in insurance and other bills. That means you only have $1200 to cover a mortgage, taxes, and home insurance. Depending on the house you are wanting you may not have enough money to cover a monthly mortgage payment. Lenders are much smarter now than they were 10 years ago and will require documents verifying how much you make and much you pay out to all your bills. Having a high DTI can definitely keep you from getting the home of your dreams.
Not Having Money For A Down Payment
Another change that has happened since the housing crash of 2008 is that lenders are wanting more down payment before giving a mortgage loan. Most require a down payment of 20% of the purchase price of a home. So if you are wanting a $200,000 home you will need a down payment of $40,000. Now for most people saving up $40,000 can seem daunting or nearly impossible and fortunately there are ways around it. If you purchase Private Mortgage Insurance you can get a home with a down payment as low as 3.5%. The Private Mortgage Insurance then must be paid until 20% of the home loan has been paid down. This payment will make your monthly payment more expensive and can affect how much loan you can get.