Even with a credit score above 800, it’s still possible to be denied for a mortgage. Looking at the mortgage industry as a whole, for a period of time, lenders were too lax, offering mortgages practically regardless of qualifications. The pendulum has swung the other way, and even qualified individuals and families are having a difficult time receiving credit.
A recent story on CNN followed a potential new home owner whose credit score was excellent. Within days of closing, the lender he had been working with denied his mortgage application. He had a strong income from last year the business he owned, but that was preceded by a year of lower self-employment income during which time he was getting his business off the ground. The year before he established his business, he had a higher income from another company. The most likely explanation for declining his mortgage was his income instability. Even though most recently, his income would qualify him for the mortgage, the lender didn’t like pattern the past few years.
The story ends well; the potential borrower found another lender who was willing to extend a mortgage offer.
I used to think there was an equilibrium between interest rates and home prices. On general, interest rates would decrease while home prices increase, and interest rates would increase while home prices decrease. This would mean that, for the most part, the benefit of buying a house in one aspect would be countered by a drawback in the other aspect. Any timing would be good timing. Today, however, home prices are low and mortgage interest rates are low. This would appear to make a better market environment for buying a house, but fewer people seem to be able to take advantage of the situation due to tighter standards.
With my self-employment, I am concerned that I, too, will find it difficult to qualify for a mortgage with great terms. If I wait longer, buying a house with cash might be an appropriate option, and it may be the only option for someone like me, whose only income is generated through a business that is rather risky. I recently signed another one-year lease for my apartment, a great place to live, but I also paid an additional fee for an option to break the lease within the next twelve months, an likely action.
CNN Money (video with commercial, unfortunately)
Updated July 28, 2014 and originally published July 11, 2011.