Did you receive a mortgage denial? Do not despair and think you have to rent for the rest of your life. There are many reasons you might not have that approval you thought you could have, but the good news is that you can fix most of them. Just because you received a denial does not mean you cannot apply again in the future. Here are five of the most common reasons consumers receive a denial on their mortgage application.
A Bad Credit History
Your credit score tells the lender about your financial responsibility. If your score is too low or your history itself is too blemished, it gives the lender a red flag. The best way to avoid this is to pull your credit on your own before you apply for a mortgage. Every credit bureau, TransUnion, Equifax, and Experian, provides you with one free credit report per year, so you can always know what your credit report says.
In general, a 640 credit score is the minimum most lenders allow, but every lender has their own requirements. The higher your score, the more likely it is that the bank will approve you. If you want to maximize your chances of approval and know that your scores are on the lower end, you should have compensating factors that make your file less risky. Compensating factors include things like a large amount of assets, a low debt ratio, or a large down payment.
Sometimes, unfortunately, it is impossible to work around a low credit score, leaving you with a mortgage denial. In these cases, you can work to improve your credit score so that you can apply again. This could mean paying debt down, paying your debts on time, or waiting until you have a longer history with many of your accounts (if accounts are too new they do not positively impact your credit score).
Mortgage Denial Due to Down Payment Problems
Most lenders look at the big picture when determining if you should get approved for a mortgage or not, but sometimes the down payment or lack thereof, renders a denial. This is usually the case when you apply for a specific program, such as an FHA loan, which requires a minimum of a 3.5% down payment or the Fannie 97, which requires a minimum of a 3% down payment. Other programs, however, have limits as well. For instance, if you have mediocre credit and a borderline debt ratio, the nail in the coffin might be a low down payment.
You should weigh the pros and cons of putting down a large down payment when you purchase a home. Some people prefer to put the minimum required down and then save the rest for their reserves, which serve as an emergency fund in the future. Sometimes, however, this is not an option, especially when you have borderline qualifying ratios that make your loan profile risky. The more money you put down on a home, the less risk the bank has to take.
Your Debt Ratio is Too High
Your debt ratio is the comparison of the monthly debts you have compared to the gross amount of money you bring in every month. If too much of your money covers your monthly debts, your debt ratio is too high. This makes you a much higher risk of defaulting on your loan, which lenders obviously want to avoid.
The overall maximum debt ratio allowed on any conventional or mainstream program is 43%; however, many lenders do not even allow the ratios to go that high. If your DTI reaches over that amount, you could receive a loan denial.
If you know your DTI is close and that a mortgage could put you over the edge, you should start working on paying your debts down. The more debts you can eliminate from your profile, the less risky you become. Even if you cannot completely pay the debts off, getting the balances down on revolving debts will help your DTI since the lenders only count the minimum required payments in your debt ratio.
Changing jobs might not seem like a big deal to you, but to the lender, it shows inconsistency. Most loan programs require a 2-year employment history. The only changes allowed are promotions during that time. In some rare cases, where you can prove that you took a new job to better yourself either with a higher income or better job, you can get away without the 2-year history, but it should be within the same industry.
If you recently changed jobs for some other reason, however, chances are you might have a hard time receiving an approval. Lenders want to see stability in your life and changing jobs does not show stability. With a 2-year history, they can see that you have a stable income and that it should continue for the foreseeable future. A new job, however, does not provide that stability or predictability.
The final most common reason for a mortgage denial is, unfortunately, not something you can control. If the appraisal does not come back at an appropriate value compared to the loan amount you wish to borrow, you might not receive an approval. The value of the home needs to match the sales price of the home. If the value does not meet that amount, you will likely have trouble getting approved. The only way around that is to pay the difference between the sales price and the appraised value if the lender allows that.