When you’re hoping to lock down a home loan, the focus is on making sure you look like a safe bet for prospective lenders.
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Conversation tends to drift to the key pieces of the pre-approval puzzle, from credit score and stable income to acceptable debt levels and suitable assets. No one’s arguing the wisdom there. But what often gets glossed over, if not entirely forgotten, are the things lenders won’t or even can’t factor into their decision.
Some of those non-factors help protect homebuyers and maintain a level playing field. Others might push a home loan out of reach for certain borrowers. That’s why it’s important to consider some of the things lenders might not.
1. Race, Age & Family Status
The Fair Housing Act and the Equal Credit Opportunity Act both protect consumers from discrimination regarding real estate and credit transactions.
Lenders and creditors are barred from discriminating against people based on their race, religion, family status and a host of other factors. Lenders also have to take steps to ensure policies don’t disproportionately affect some groups more than others.
For example, a lender with a policy of only making loans of $100,000 or more is especially likely to hurt lower-income borrowers. That harm is known as disparate impact, and it’s a fair housing problem. You also can’t be turned away from a 30-year mortgage because you’re in your “golden years.” Age discrimination is also against the law.
2. Non-Borrower Income
This may go without saying, but it’s essential to have enough income to cover the new mortgage payment, maintain a healthy debt-to-income ratio and meet other asset-related requirements.
Some buyers make enough money alone to handle the mortgage. But plenty of others need or want to count the income of a spouse or significant other to help cut down a debt load or to buy more house. The rub is you can’t count that person’s income unless they’re actually co-obliged on the loan with you.
Any co-borrower will need to meet the same credit and underwriting requirements that you will. That means a lackluster credit score could render your spouse’s six-figure income untouchable, at least in terms of your purchasing power.
3. Some Income Types
In addition, not all forms of income are created equally – or will be counted by lenders toward qualifying for a home loan. Temporary income can be a tough sell for lenders, who are looking for reliable streams that are likely to continue. Unemployment income isn’t likely to factor into your mortgage qualification.
Some lenders and loan types may consider it in a handful of cases. Seasonal employees who routinely rely on unemployment compensation during certain times each year may be able to count it, provided there’s a solid history of receiving it and the compensation is likely to continue.
Veterans are often dismayed to learn that mortgage lenders won’t count the housing assistance they receive as part of their GI Bill benefits. It can be especially confusing because lenders can and do include the Basic Allowance for Housing that certain active service members receive.
4. Shopping Around
Having a lender pull your credit scores constitutes a “hard inquiry.” You can lose a couple points from your score anytime a potential creditor conducts one of these. But when you’re considering a significant purchase, like a home, the credit agencies give consumers greater leeway to safely shop around. Once a lender pulls your credit, you’ve typically got a two-week window to have others do so without taking a hit to your score.
The nation’s three major credit bureaus – Equifax, Experian and TransUnion – will only count that first hard inquiry against you. They’ll chalk up the remainder to due diligence and comparative shopping during that two-week timeframe. Seeking loan pre-approval from multiple lenders isn’t likely to significantly impact your credit score or your qualification chances. If you want to see how the mortgage-shopping and pre-approval process are affecting your credit, it can help to monitor your credit scores before you begin the process, so you know where you stand, and have something to compare any fluctuations to in the following months. You can check two of your credit scores for free every month on Credit.com.
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