What is a red flag in a mortgage? Lenders have a vested interest in ensuring you are a trustworthy, capable borrower able to make consistent payments for the life of the loan. To assess this risk, underwriters scrutinize every aspect of your financial profile during the approval process. Any concerning issues they uncover are considered “red flags” that could potentially derail or delay the mortgage loan process.
In this blog post, Houston realtor Chris Schmidt and the professionals at Your Home Sold Guaranteed Realty - Chris Schmidt Team will discuss the top red flag in a mortgage, as well as several other common issues lenders look for.
Key Takeaways:
- Having a low credit score, usually below 620, is the top red flag for lenders. Your credit score represents your track record of responsibly managing debt obligations.
- Even if your score meets the minimum, having a limited credit history or few accounts are also red flags. These problems raise doubts about your ability to borrow.
- Lenders want to see a reliable stream of income that can adequately handle mortgage payments. Frequent job changes, gaps in employment, or recent job changes can be red flags about the dependability of your income.
What is a Top Red Flag in a Mortgage?
Having a low credit score, usually below 620, is the top red flag for lenders. Your credit score represents your track record of responsibly managing debt obligations. Low scores indicate a history of late payments, maxed-out credit lines, collections activity, or other financial difficulties. These issues make you appear a high-risk borrower.
Even if your score meets the minimum, having a limited credit history or few accounts are also red flags. These problems raise doubts about your ability to borrow because there isn’t enough data to accurately assess what kind of borrower you are.
What Are Other Red Flags in a Mortgage?
- High Debt-to-Income (DTI) Ratio: Your DTI ratio represents how much of your monthly gross income goes toward recurring debt payments. This can include debts from credit cards, auto loans, student debt, and the proposed new mortgage. Make sure your DTI ratio doesn’t exceed 43 to 50%. If it does, it raises a red flag about your ability to reasonably afford the new mortgage payment on top of your existing debts.
- Unstable Income and Employment History: Lenders want to see a reliable stream of income that can adequately handle mortgage payments. Frequent job changes, gaps in employment, or recent job changes can be red flags about the dependability of your income.
- Undisclosed Debts and Unusual Deposits: Honesty and transparency are essential when applying for a mortgage. Failing to disclose all outstanding debts and liabilities on your application is fraud and an immediate red flag. Similarly, avoid any large, unexplained deposits around the time of your application. Large deposits can raise questions about undisclosed income sources that need to be documented.
- General Red Flags for Mortgage Fraud: Beyond accidental omissions, any intentional efforts to mislead or defraud the lender are red flags. These violations carry heavy penalties and will immediately disqualify your application if detected. This includes inflating your income or assets, using stolen identities or “straw buyers,” and falsifying occupancy intentions.
- Recent Major Purchases: Before applying, avoid any major spending sprees like financing a new car, racking up excessive credit card balances, or major cash purchases. Large purchases will impact your DTI ratio and credit utilization and demonstrate irresponsible borrowing behavior.
- Incomplete or Missing Documentation: Mistakes, missing pages, or incomplete paperwork in your application file are also a potential red flag for lenders. Missing tax returns, bank statements, pay stubs, or other required verification documents also create hurdles that can slow approval.
Avoid Red Flags by Working with Professionals
By understanding and avoiding these red flag issues, you can present the strongest mortgage application file possible and sail through underwriting with confidence. Work closely with an experienced Houston lender to identify and resolve any concerns early in the process. Their expert guidance, combined with your patience and preparation, sets you up for a smooth path to get a loan and buy a home in Houston.
Call or Text Chris Schmidt Today to Get Your Mortgage Loan Process Started!
Chris Schmidt is the owner of Your Home Sold Guaranteed Realty – Chris Schmidt Team. He has 20+ years of experience in real estate and is deeply familiar with the Houston housing market. He’s a member of the Houston Association of Realtors and has earned the Graduate, Realtor Institute designation from the National Association of Realtors.
He began his real estate career in 2004, when he joined Coldwell Banker United as a broker associate. He worked as a broker associate for over 10 years before deciding to begin his own real estate and mortgage lending team.
If you work with Chris Schmidt and the agents at Your Home Sold Guaranteed Realty – Chris Schmidt Team, you’ll have nothing to worry about on your home purchase or sale of your home. We’ve received numerous 5-star reviews from past clients who loved working with us. Clients value working with our team because we always take the time to understand their real estate goals and learn about what’s most important to them.
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