If you dream of owning a home
someday, it's important to understand that getting a mortgage is not always
easy. The reality is that out of every eight mortgage applications, at
least one is denied. So for a large percentage
of Americans, the goal of home ownership seems to be out of reach.
Instead of giving up and
leaving your mortgage loan application approval to chance, it's time to
understand what could potentially hold you back from owning a home and address
it. Here are the most common reasons for home loan denials and steps you can
take to correct each issue so you can finally purchase your own home.
The most common reason
lenders deny applicants for mortgages is because of a high debt-to-income ratio.
In 2017, more than 50,000 applicants were denied
government-backed loans
because of this. Lenders calculate this ratio by adding up your monthly debt
payments and dividing them by the amount of gross income you make. If the
number is too high - more than 43% - lenders worry about the borrower's ability to
make payments on the mortgage.
A smart strategy is to plan
ahead before applying for your home loan. Months or years before your purchase,
focus on lowering your debt by cutting back on monthly expenses. Make extra
payments if you have high credit card balances and lower your debt-to-income
ratio to a more reasonable percentage.
Having poor credit is the
second biggest reason lenders deny mortgage applicants. FHA loans require a
credit score of at least 580
to qualify for a conventional loan.
Lower scores may qualify, but those borrowers need to put more money down. Here
are some reasons why your credit score may be too low:
Next, mortgage application
denials happen sometimes if there's a problem with the property. If the bank
determines your home isn't worth the amount of your loan, you could get a
denial. If this situation happens to you, it's best to consider a different
property that appraises at a higher value. A home may not appraise at a high
value if there are significant structural issues, problems with the
neighborhood or similar properties nearby that appraise low. Some buyers end up
putting more cash in the down payment to make up for the difference in a low
appraisal.
It's
also possible to get a mortgage rejection if you don't fill out your credit
application correctly or completely. If your credit application is denied due to
incompleteness,
you'll receive a notice stating this. Your notice may also indicate which items
you failed to complete on your application. It's important to include
documentation for parts of your mortgage application as well. Failing to
include the right documentation could present a problem and lead to a loan
denial.
Along
with incomplete applications, there are denials for applications that have
unverifiable information, too. These denials usually arise from discrepancies
in information between a potential borrower's application and the credit report.
There could also be a problem if information is entered incorrectly in the
mortgage application. Before you go through the process of looking for a home
loan, make sure you carefully check your credit report for any errors. Talk to
your creditors about fixing any information that's wrong so you aren't at risk
of getting a mortgage denial.
It's
also likely to get denied for a home loan if you don't have sufficient cash for
a down payment. The ideal amount of cash for a down payment is 20% of the home's value,
but if you don't have that much saved up, it's still possible to get approved
for a home loan. Borrowers who don't put 20% down must pay mortgage insurance
along with their house payment. There are also loan programs for specific types
of buyers that allow them to put less money down on their dream homes.
Your
employment history also matters to mortgage lenders. Banks and other mortgage companies
want to see a consistent employment history that demonstrates an ability to pay
the house payment each month. Lenders pay special attention to a borrower's job
history from the past two years. If your application shows large gaps in your
work history, multiple job changes or inconsistent income, it may be rejected.
You
can avoid this by talking to your lender and explaining any gaps in employment.
Lenders may be more understanding if a gap in employment was due to returning
to school or taking time off to raise children. Be sure to provide
documentation for training and college coursework if you were enrolled in
school instead of working.
The
last reason why borrowers are denied for mortgages is if they can't secure
mortgage insurance. Private mortgage insurance is required for buyers who put
less than 20% down for most loan types. Instead of a hefty down payment, borrowers
can opt to pay monthly PMI.
Banks
use this to help reduce the risk of lending money to borrowers who don't have
as much invested in their homes. If your PMI application is denied and you
don't have enough money for a larger down payment, your mortgage application
could be rejected. PMI applications also rely on a credit check, so if your
credit situation is shaky, you could be putting your home purchase at risk.
Stay
informed about your credit history and spot any potential pitfalls to home
ownership. Sign up for
CreditRepair.com to improve
your credit before the big purchase. Make sure your finances are ready for this
important life step. Call us today for a free credit evaluation.
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Sources: HomeGuides | FTGClosings | TheMortgageReports | MyFICO | FHA |MoneyUnder30
