A good income does not automatically mean good loan terms. Any self-employed individual who has tried to get a mortgage loan knows that it’s far from easy to get a good loan rate, no matter your income. A 1099 tax form isn’t as encouraging as a straightforward W-2, and those who are self-employed take care to use as many tax deductions as legally possible — and that can skew the view of income. Even if you have a good income as evidenced by a W-2 tax form, if your debt-to-income ratio is high or if you have a low credit score, you might not get the best interest rate offered on the market.
The loan approval is just the beginning. Many people assume that after they are approved for a mortgage loan, they are all done with worrying about their credit scores or other financial matters. This isn’t the case. Many mortgage lenders pull your credit again between your approval and when you close on the loan, and some lenders check your credit score as near as five days before the loan closes. If that happens, and your credit score has taken a dive, then the financing could fall through at the last minute. If you want the best mortgage rates, you need to keep your credit in good shape until the closing goes through. Avoid applying for new credit accounts and running up credit card balances.
Ratios are helpful, but not guaranteed. You might have heard of the 28/36 qualifying ratio. This ratio looks at how much of your income goes toward your mortgage payment each month, as well as how much of your income goes toward overall debt payments each month. In theory, your mortgage should be no more than 28% of your income each month and your total monthly debt payments shouldn’t exceed 36% of your income. However, while these ratios may offer useful guidelines in helping you determine whether or not you can afford a mortgage, it doesn’t have much bearing on whether or not you are approved for a loan or the rate you will be offered.