If you’re on this mailing list, you’ve indicated an interest in being a home-owner. Chances are, you may not yet be one, but would like to become one.
Unless you are wealthy and can buy a home for cash, the only way to get into home ownership is to get a mortgage on a property. You will have title to the property and experience all the benefits of home ownership, but the bank (or other lender) will have a registered charge against the property whereby they will get paid out first when the property is sold.
From the applications I get to our Rent 2 Own program, it is clear that many don’t understand all of the factors that are required in order to qualify for a mortgage. There are four main things that any lender will require.
1. A secure income
Before any lender will consider you for a mortgage loan, the lender will want to be sure that you have the ability to pay it back. Do you make a steady, regular income, so that you can afford the monthly payment? And will you be able to do so every month, for an extended period into the future? If you work in a union or civil service job of any sort, lenders will love you, because that is very secure. They will require, though, that you are past any probationary period in the job, so that you are not likely to lose it. Other full-time wage or salaried income is also a good source of income.
Self-employment income is more troublesome for the lenders because it is less steady and less secure. Therefore, they will typically want at least two years of records showing that you can keep a steady income stream more than adequate to cover the loan you are applying for. They will typically use the average of the last two years as your income (unless the trend is downward, in which case they may use only the latest year’s amount.) But there is another difficulty you may face when your income is from self-employment. One of the benefits of self-employment is that you can “write off” a lot of expenses against your income, so as to reduce the taxable amount. However, the lender is compelled (with a little discretion) to count only the “net” amount, that is, your taxable income, as the source of funds to pay for that mortgage. So the tax benefit of self-employment may be a detriment when you want to get a mortgage.
Other sources of income that may be used are: government issued child benefits that are secure for at least several years into the future, permanent disability income, and permanent pensions.
2. A track record of responsibility
How will the lenders determine whether you are a responsible person who will pay back the loan you are asking them for? They will look at your track record. And that track record is all laid out for them in the records of the main credit reporting agencies (aka credit bureaus): Equifax and TransUnion.
Have you borrowed money in the past? If so, the lender will have reported that to the credit bureaus, and your record of payments will be laid out there. From all of your borrowing history, the bureaus create a composite score, which any potential lender will check, along with your record of payments, before determining whether you are a good enough risk for them to lend you money. There are many things that make up the score and the algorithms are complicated.
The whole topic of what makes up your credit bureau report and how to improve your score is much too complicated to cover in this post but, in general, the following are the minimum requirements for getting a mortgage: you need at least two credit lines, one of which must be a credit card; you need to have had those two credit lines for at least two years; those credit lines must have limits of at least $2000, unsecured; you cannot have any unpaid collections, judgements or bankruptcies reported within the last few years; and you must not have had even a single late payment for the last year. In addition your comprehensive score will need to have reached the benchmark the lender has placed for the loan.
If you have no track record (i.e., a profile with the credit bureaus), then you simply cannot get a loan, no matter how much money you make, or have in savings.
Next week: The remaining two requirements
Would you help me out?
Since the start of this blog, I’ve offered my little booklet “Why Own When You Can Rent?” Many of you have clicked the link on the right-hand margin and found the booklet helpful. Thank you! Because of your encouragement, I’ve now expanded it, internationalized it, and published it on Amazon Kindle (for $0.99).
But, as you likely know, it will only sell on Kindle if it has some positive reviews. Will you give me a positive review on Kindle (4.5 – 5 stars)? Click here to take you directly to the Kindle book. For the first five positive reviews, I will send you a free copy of the all-time personal finance best-seller, Rich Dad, Poor Dad, by Robert Kiyosaki.
Instructions: 1. Click the link on the right, which will take you to the book on Amazon Kindle; 2. Download it (will cost $.99, but I’ll reimburse you); 3. Leave a review; 4. Copy your review into a “Reply” to this blog post; 5. Add your mailing address to your reply email, so that I can send you the book; 6. Send to me.
Thank you in advance!