A lot of young adults are eager to break out of their parents’ houses as soon as they finish school. Most rent, but more and more young adults are intrigued by the idea of owning and either renting or sharing costs and accommodations. It’s an exciting idea that begins to build asset wealth early, but first time home ownership comes with a set of challenges that you need to plan for if you are going to be successful.
The best place to start is by understanding how lenders think and act, and what they expect from an applicant.
It’s pretty obvious, you need steady work in order to qualify for your own mortgage, but it’s not that simple. Depending on the kind of employment you have, not all lenders are the same to deal with.
The best-case scenario for a first time homebuyer fresh out of university or college is to have a guaranteed salary from an employer guaranteeing them full time work. Lenders usually want the applicant to be past the typical 3-month probationary period, but lenders will make exceptions for strong applicants.
The next best-case scenario is being an hourly-paid employee who is guaranteed full-time hours by their employer. Lenders usually treat these applicants like salaried employees and it’s often smooth sailing. Where it can get a bit sticky is when the employee isn’t guaranteed enough hours of work. Take a nurse for example. They start out as part time but could be working up to 50 hours week. The lender will only qualify these employees based on either their guaranteed hours or their average earnings based on their past 2 year’s gross income. So even with overtime, lenders can still delay an eager first time home buyer until they have 2 years of strong income in order to qualify for their new home.
The toughest challenges are applicants who are newly self-employed or commissioned employees. For these applicants lenders typically average the past 2 years worth of gross income to determine whether they qualify for a mortgage. Again, this can be frustrating for these new employees as they are typically being trained during their first two years and only begin making strong income in the years following that training, which can greatly delay their opportunity to buy a home.
Typically many new homebuyers who have just graduated are carrying debt. Whether it is for student loans, car loans or various credit cards, lenders take these debts into consideration when qualifying someone. In fact, even cell phone bills are considered as part of this review! Your debt/net worth are definitely are definitely a challenge when you’re first starting out, and our best advice for getting his equation right is to save, save, save! The more assets young homebuyers can accumulate the easier getting a mortgage will be. Student loans are inevitable and in most cases are not major issues as the repayment plans for these loans are low and flexible. But paying off a car loan and eliminating that big monthly payment can have a major and positive impact on your ability to qualify.
As you’ve seen in some of our previous blog posts, your credit is the third major factor lenders look at when qualifying a new applicant. Your repayment history is a huge part of your credit score, but so too is making sure you do not max out all of your credit cards. By maintaining a minimum of at least 35% of your card limit unspent, you will positively impact your credit score, thereby positively impacting your ability to qualify for a mortgage.
Here’s another important credit tip: Believe it or not, a lack of a credit history is, in many cases, worse than having bad credit. It is becoming quite common where I see cases of new applicants not using or even having a credit card, and this can become a big problem with lenders because no credit history doesn’t prove an applicant can manage money, even if they are diligently using cash for purchases. I know it doesn’t make much sense but getting and using credit properly is a great boost for your credit score.
And here’s a bonus tip: lenders love to see young applicants have 2 active trade lines (via credit card, LOC, or loan) for at least 2 years so that they can build a healthy credit score. They want to see them using these sources of credit. My advice is to use one credit card for gas and one for your groceries, pay them off on your payday biweekly, sit back and watch your credit score soar.
First time mortgages can be challenging, but when you work with a solid mortgage broker you can understand and employ strategies that will get you to the point of qualifying, faster. That’s what I do best, so I hope you drop me a line to discuss these and other ideas that will support your goals.
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