June 23, 2021

Moving from one rental to another to avoid the next rent increase may not be practical, but sometimes it’s necessary. While not everyone will qualify for a mortgage, renters often avoid taking the steps to become homeowners due to a few common misconceptions about the home loan approval process.

Here are four myths about mortgage loan approvals that prevent renters from becoming homeowners.

Myth #1: I have to remain with the same employer for two or more years to qualify for a mortgage.

Lenders evaluate several factors when determining a borrower’s ability to repay the home loan as agreed. One of those factors is stable employment history. While this doesn’t mean you have to stay at a job you dislike, it does mean that switching companies every few months without a reasonable explanation will hurt your chances for approval of a mortgage loan.

Circumstances that may justify a shorter history with the same employer or position include:

  • A lateral position at the same company became available that allows for long-term career growth
  • Career advancement meant taking a job out of the city or state
  • A higher paying position became available

Don’t ignore career opportunities for fear of a mortgage loan denial.

Myth #2: I can’t obtain a mortgage until the negative data falls off of my credit history report.

It’s critical that you pay all of your bills on time since it is the biggest factor affecting your credit score. Late payments stay on your credit report for seven years. But, as you continue to pay on time, those payments will have less of an impact as they age and more on-time payments are reflected. Although on-time bill payment is the most significant factor, it’s not the only one. So, don’t despair.

More than late payments stick to your credit history report. Other negative items such as civil judgments, bankruptcies, and even closed accounts stay on your credit history report for anywhere from seven to ten years. You don’t need a perfect credit history report or credit score to obtain a mortgage. But, you do need to show you have a recent history of using credit responsibly.

Have you missed several payments in the past year? Focus on establishing a consistent history of making timely payments for at least 24 months before applying for a mortgage loan. Do not add to your credit balances. Instead, spend some time building a consistent history of making payments by the due date while reducing your debt load.

Myth #3: I need a large down payment to purchase a home.

A down payment equal to 20 percent of the purchase price may be common in the Hawaii real estate market, but it’s not required. The advantage of providing a down payment of 20 percent or more is that it removes the need to pay for private mortgage insurance (PMI). Generally, lenders who provide home loans in excess of 80 percent of the value of the property determine the loan to be high risk and require PMI to ensure against default and subsequent foreclosure.

If, however, your spending plan has room for PMI, then consider a Federal Housing Administration (FHA) loan since it only requires a down payment of 3.5 percent.

Myth #4: If I have other debts, such as auto or personal loans, I won’t qualify for a mortgage.

You can have other debt obligations and still obtain a mortgage loan with a low-interest rate and favorable terms. Auto, personal, and student loans are common among first-time homebuyers, but the amount of debt carried could stop you from owning your own home.

Lenders look at how much is paid towards your debts each month (minimum monthly debt payments) versus how much is available to put towards that debt (monthly gross income). The resulting figure is called debt-to-income ratio (DTI). Let’s say the Kalani family must pay a total of $800 on two auto loans and one personal loan each month. Their monthly household income before taxes is $5000. This means that the Kalani’s DTI is 16 percent.

Home loan programs for first-time buyers offer a variety of ways for individuals and families to make their dreams of owning a home a reality. Dispelling these and other myths is the first step to determining your financial readiness for home ownership.