Mortgage application denied?!? Those three little words can invoke panic and anger. Why didn’t I meet the lender’s requirements? This question may pop into your head, but in the wake of tighter lending requirements, many applicants are finding themselves on the wrong side of the fence. To get through the process with ease, understand factors that can get your mortgage application denied.
1 Can’t Back up Income
You may earn enough monthly to pay your mortgage and other bills, but if you can’t document this income, expect to have your mortgage application denied. Mortgage approvals are harder for self-employed people who don’t receive a paycheck from an employer. Keep accurate financial records and document all your income. Be prepared to provide the lender with tax returns from the past two years.
2 Down Payment is Too Small
I’ve seen it before, couples excitedly apply for a home loan, only to have their dreams crushed when the lender requires a down payment. Unless you’re applying for a VA home loan or a USDA home loan, you will need some sort of down payment. Conventional mortgages require 5% down, whereas FHA mortgage loans require 3.5% down. Some mortgage applications will ask you to list your amount of cash reserves.
3 Too Much Debt
Few people are completely debt-free, and having an auto loan and some credit card debt doesn’t stop a mortgage application approval. But if you have a high debt-to-income ratio - greater than 36% - this can trigger a mortgage application denial. To calculate your DTI, divide the total of your minimum debt payments by your gross monthly income. To improve your chances of a home loan approval, pay down debt before completing an application.
4 Haven’t Checked Your Credit Score
Never, never never apply for a mortgage without first checking your credit score. Why? Mortgage lenders are particular, and if you’re applying for a conventional mortgage, you need a score 680 or higher. Check your score first and you avoid wasting your time. If your score is too low, take this time to raise your rating - pay bills on time and pay down debt.
5 Unstable Employment
A job layoff isn’t your fault. But unfortunately, many lenders require two years of consistent employment. Regardless of whether you’re currently employed, recent gaps in your employment history can delay a home loan approval. There’s no harm in applying, but understand that some lenders are strict and will not excuse a layoff.
6 Didn’t Complete the Application
Mortgage lenders are busy. And if you don’t complete each field on the home loan application, the person reviewing your information may deny your request. Of course, you can always re-apply, but why go through the hassle? Don’t rush the process. Take your time and double check each line before submitting your application.
7 Credit Report Mistakes
Maybe you’re a victim of identity theft, or perhaps your creditors included wrong information on your credit report. Both are possible scenarios, but if you don’t check your credit report, you may not learn of these problems until you apply for a mortgage. Save yourself the headache and learn your credit history before the lender orders your report. Get your reports from AnnualCreditReport.com.
Being denied a mortgage loan isn’t the end of the road, it only means that you need to work harder and give yourself time to improve your situation. Develop a plan that will help you meet a lender’s requirements, and constantly review this plan to stay on track. What financial changes did you make in order to qualify for a home loan?