It’s not easy to get a mortgage approved. You can, however, lower your chances of having your mortgage application declined. Knowing the most common reasons for mortgage application denials might help you take steps ahead of time to ensure your application satisfies your lender’s requirements.
According to data supplied to the federal government by mortgage lenders under the House Mortgage Disclosure Act, around 8% of all U.S. homebuyers had their mortgage loan application for a single-family home refused in 2019. It doesn’t mean you’ll never be a homeowner if your mortgage application is declined.
A mortgage lender may reject a mortgage application for a variety of reasons. Fortunately, the cause(s) of denial are usually overcomeable. Understanding the cause(s) and what you can do to solve the situation is crucial to your success(s).
There are five frequent reasons why mortgage loans are refused:
Understanding the most common causes for mortgage application rejection will help you avoid being turned down.
Excessive debt-to-income ratio:
The debt-to-income ratio is the percentage of your income that goes toward paying your monthly bills, and it helps a lender assess how much money you can borrow based on your ability to return the money you’ve requested. Borrowers should aim for a debt-to-income (DTI) ratio of less than 45 percent, although a lower ratio is preferable. To calculate your debt-to-income ratio, tally up all of your monthly debt payments, such as rent, car payments, student loan payments, and credit card payments, and weigh them.
Pay down debt (credit card balances, school loans, auto loans, personal loans) or raise your income to lower your DTI.
Poor credit rating
The better your credit score, the more likely your mortgage application will be granted and the lower the interest rate you will receive.
To qualify for a conventional or FHA home loan, most lenders require a credit score of at least 620. While some mortgage programmes will accept a lower credit score, they will charge a higher interest rate because a lower credit score signals a bigger risk for the applicant.
Tips for improving your credit score include:
- Each month, pay your bills on schedule.
- Reduce the amount you owe on your credit cards.
- Don’t get any new credit cards.
- Limit your credit card spending to the amount you can pay off each month.
- Check your credit records for any mistakes.
Even if the accounts have been addressed, past delinquencies, bankruptcy, a previously owned house lost due to foreclosure, or a short sale can all come back to harm mortgage loan applicants. When lenders tighten their mortgage lending standards, as they did in 2020 as a result of the economic instability caused by the coronavirus epidemic, homeowners may face additional challenges in obtaining a mortgage. For example, two years after a Chapter 7 bankruptcy, a borrower who has recovered strong credit can apply for an FHA house loan. In times of economic uncertainty, however, a lender may impose a lengthier waiting period.
Tips for repairing credit history:
Review your credit reports from each credit reporting agency before applying for a mortgage. Under federal law, you have the right to free credit reports from annualcreditreport.com or 877-322-8228, the only approved source. Check that any accounts that were previously delinquent have been changed to reflect their current status, such as paid in full. If you find any inaccuracies, the website provides instructions on how to register a dispute.
To raise your credit score, do the following:
- Paying your bills on time each month is a good place to start.
- When you’ve paid off your credit cards, don’t close them.
- If the urge to use the card is too strong, cut it up.
Low down payment:
Lenders examine the loan-to-value (LTV) ratio on your mortgage application to see how much money you’re asking for compared to the value of the house you want to buy. While you can apply for a home loan with as little as 3% down, and VA and USDA home loans require no money down, a bigger down payment can lower your LTV.
Low LTV ratios are preferred by lenders since they protect their investment if you are unable to make your mortgage payments in the future. That’s why most mortgages with a loan-to-value ratio of more than 80% require private mortgage insurance, which is paid monthly with your mortgage payment.
Tips for increasing your down payment:
While it’s critical to pay down debts to reduce your DTI, it’s also critical to save money to increase your down payment. Start saving the majority of the cash flow you were using to pay down your debts once your DTI is below 45 percent.
In a hot housing market, home prices rise gradually, making it harder for the appraiser to discover recently sold homes in the area to utilize for the appraisal comparison. The loan-to-value (LTV) may be more than the lender can legally authorize if the appraisal for the property you wish to buy is much lower than the purchase price.
How to Deal with a Low Appraisal:
Property value difficulties, fortunately, are frequently handled. This is when working with an experienced real estate agent comes in handy since they may renegotiate the buying price of the house. If the seller refuses to lower the price, another alternative is to put down a higher down payment to cover the gap between the lender’s loan amount and the sales price. Alternatively, select a home within your price range that will appraise at market value.
Nobody wants their mortgage loan application to be turned down, especially if they were pre-qualified or pre-approved. Fortunately, most of the reasons for denial of mortgage applications can be avoided. It’s critical to speak with your lender before filing a mortgage application if your financial circumstances have changed since you were pre-qualified, pre-approved, or denied. They can tell you if your current situation will affect the likelihood of your mortgage being granted or denied, as well as how to increase your chances of getting approved.