A mortgage lender looks at several factors when deciding whether to approve a loan application. A lending institution wants to know that a borrower has both the ability and the will to repay debts. If you have a high income and a low credit score, a lender may have reservations about approving your mortgage application.
How a Lender Looks at Income and Credit Score
A lender adds up the costs of housing, car payments, student and other loans, and credit card payments and divides the total by an applicant’s gross monthly income to arrive at a percentage known as the debt-to-income ratio. Some lenders require a low debt-to-income ratio, while others are much less stringent.
A credit score reflects a person’s payment history and use of credit. Someone may have a high income, but that doesn’t mean much if the individual spends money frivolously instead of paying bills. A low credit score is a red flag that can cause a lender to think that a loan applicant doesn’t know how to handle money responsibly. A person with a low credit score is more likely to make payments late or miss them altogether than someone with a higher credit score.
How to Qualify for a Mortgage With a High Income and Bad Credit
Credit reports sometimes contain errors because the information was reported incorrectly, wasn’t reported at all, or got mixed up with someone else’s information. You’re entitled to receive a free copy of your credit report from each of the three major credit bureaus once a year. Check your reports for errors that could be lowering your scores. If something doesn’t look right, dispute it so the mistake can be corrected.
You can also hold off on buying a house and take some time to pay down debt and boost your credit score before you apply for a mortgage. That’ll help you get a better interest rate and avoid paying tens of thousands of dollars in additional interest over the life of your mortgage.
If you want to buy a house soon but are concerned about your low credit score, you can apply for a mortgage through a lender that is forgiving. The Federal Housing Administration, U.S. Department of Veterans Affairs, and U.S. Department of Agriculture offer loans to borrowers with low credit scores. If you have bad credit, you should expect to pay a higher interest rate than someone with a better credit score. Making a large down payment could reduce the loan-to-value ratio and make the loan less risky for the lender, which might help lower your interest rate.
Explore Your Options
Lenders will look at your entire financial picture when deciding whether to approve your mortgage application. A combination of a high income and a low credit score may be a red flag. Work on improving your credit, explore options for borrowers with poor credit or save as much as possible for a down payment to improve your chance of being approved for a home loan.