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.
High Debt-to-Income Ratios
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.
Poor Credit History
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:
- Late Payments: Making payments late causes your score to drop. Make an effort to pay your bills on time. If you anticipate a problem one month, call your credit card issuer to ask about a different payment plan.
- Bankruptcies or Judgments: Declaring bankruptcy may impact your credit score for up to 10 years. Judgments may also make it harder for you to qualify for mortgages. Aim to rebuild your credit over time with responsible use of credit cards designed for poor credit.
- Too Many New Accounts: Avoid opening multiple new credit accounts in the months before applying for a mortgage. Too many credit inquiries lower your score.
- High Balances: Having high credit card or loan balances also may lower your credit score. Prepare for home ownership by tackling high debt balances.
Problems with the Home’s Value
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.
Incomplete Credit Application
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.
Unverifiable Information
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.
Not Enough Cash
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.
Shaky Employment History
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.
Lack of Mortgage Insurance
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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