mortages

5 times it pays to wait to get a mortgage

Aug. 15, 2013 at 7:28 PM ET

You're doing everything right, paying your bills on time, earning a good living, and you're applying for a mortgage – with second thoughts. Maybe you're trying to buy a new home and something's just not right, perhaps the payment is too high. Whatever the case, paying attention to those warning signs could mean the difference between making a potential mistake worth thousands of dollars and choosing the path that makes better financial sense.

When you apply for a mortgage, a lender conducts a thorough analysis of your credit history, credit score, income, employment status, job history, as well as your ability to make payments on your debt. You can rest assured that if the numbers don't make sense and home affordability is problematic for you, it will be apparent to the lender.

Here are the five times you should consider waiting to apply for a mortgage.

1. Your Debt Is Too High.

If more than 10 percent of your monthly income goes to liability payments (car loans, credit cards or other debts), not only will these liabilities hurt your ability to qualify, they limit how much house you qualify for.

Remember, liabilities (debt) erode borrowing power to a ratio of 2:1. In other words, a minimum payment on a credit card at $100 per month needs $200 per month in income to offset that liability payment. You should also consider how much more manageable that mortgage payment would be without those liability payments. It may make more sense to pay off those limiting debts for a future benefit.

2. Your Income Is Too Low.

Perhaps your debt payments are too high, and you need more income to compensate for that – or you need to pay off your debt in order to qualify. Maybe your income is just not high enough to support a payment for a house in the price range you want. This differs in many markets, but generally speaking, you need to have enough income to support a house payment of at least $1,500 per month when buying a home. How much income are we talking about? At a minimum, just shy of $40,000 per year or 55 percent of a $1,500 mortgage payment.

3. You Don't Have a Down Payment and Closing Costs.

You'll need at least 3.5 percent of the purchase price for a down payment. This can be your money or it can be gifted money. On a $300,000 house, for example, that's $10,500 down. Gone are the days when you could get seller credits for closing costs. Typical closing costs are approximately 3 percent of the purchase price, so that’s an additional $9,000 in closing costs for that same house. You’ll need for a grand total of $19,500 to make the purchase.

4. Your Employment Is Not Stable.

Possible change of careers? How about a job gap? These situations can hurt your ability to qualify for the loan, and they raise serious questions about whether you can support a house payment. This includes changing job status, for example going from being a W-2-wage earner to self-employed and vice-versa, as lenders will look at the income you can show on paper. If you're in a transitional situation with your employment and your income is potentially in question, buying a house can be a recipe for disaster.

5. Your Credit Is Less Than Stellar.

Do you have derogatory items on your credit, like a bankruptcy or short sale, or even a foreclosure? It's an automatic 2- to 3-year wait to re-enter the market. This is a prime opportunity to save for a down payment and closing costs, and to clean up your credit history to prepare to purchase a home later on. You can pull your credit report for free once annually from each of the three major credit reporting agencies at AnnualCreditReport.com or you can monitor your credit on a monthly basis using the free Credit Report Card.

Remember, while you might still qualify for the mortgage now, that does not necessarily mean you should accept the obligation. The long-term prospectus of what that obligation means over time is paramount. Consider the effects the new mortgage payment will have on long-term savings ability, household cash flow and lifestyle. The last thing anyone wants is to be tied to a mortgage payment that they can't adequately support.

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