Common Reasons a Mortgage Application is Denied
Common Reasons a Mortgage Application is Denied. With so many home loan instruments available to prospective buyers, it can be daunting to navigate the advantages and disadvantages of each. While every buyer’s situation is unique, it’s important to know that some types of loans are inherently riskier than others. For the majority of homeowners, it is usually best to avoid the following three types of mortgage loans.
Common Reasons a Mortgage Application is Denied
1. Your Credit Score Is Too Low
A low credit score may signal that you are a high-risk borrower who will have problems paying payments on time or managing the loan’s finances.
Examine your credit report before applying for a mortgage. Dispute any inaccuracies. If you have bad credit, you should improve it before applying. If you have a good credit score, don’t skip a payment or max out a credit card throughout the mortgage process.
2. Your Debt-To-Income Ratio (DTI) Is Too High
Your DTI ratio tells lenders if you can afford more debt. A high DTI may prevent you from getting a mortgage. Most lenders want a DTI below 50%. Keep DTI at or below 43% to maximize loan possibilities.
If you have a lot of debt, you should pay it off first. And once you’ve got one, don’t add to your debt by making large purchases unrelated to your home purchase. By paying down some debt, you’ll improve your cash flow and show a potential lender that you can afford a mortgage. Continue reading to discover Common Reasons a Mortgage Application is Denied.
3. The Loan-To-Value Ratio (LTV) Is Too High
LTV relates your mortgage to the home’s worth. Your down payment reduces your LTV when buying a house. Some loans have minimum down payments and LTVs. For example, a standard loan requires 3% down or 97.5% LTV. You won’t get a loan if you can’t afford the minimum down payment.
To avoid this, save up a down payment of 3% – 3.5 % depending on your loan. A greater down payment will not only help you get better rates and more mortgage options, but it will also demonstrate lenders that you can save. For self-employed or other risky borrowers, a high down payment can calm a lender’s nerves.
If you need extra support, look into down payment assistance programs.
4. Your Employment Status Recently Changed
Lenders prefer stable finances. Paying your bills on time is easier when you have a consistent income. A lender may question your ability to pay a mortgage if you recently lost your job. And a new job might be very uncertain. You might quit. You may be fired. Maybe you took a job paying less, affecting your loan approval.
This isn’t usually an issue if you’re changing jobs in the same field and earning the same or more. If not, you can avoid this by continuing at your present work until after the closing or applying for a mortgage after a few months at your new position.
5. You Have Unusual Bank Account Activity
Aside from the mortgage, you must also pay closing costs, insurance premiums, taxes, and homeowners association fees. In many circumstances, your lender will require that you have 6 months’ worth of expenses in the bank. Large accumulation, especially from unknown origins, can provoke suspicion. These could imply a loan for a down payment, increasing your DTI.
An important gift letter from the donor indicating that the money was a gift and does not need to be repaid can help.
6. There Are Problems With The Property
An inspection’s results can either make or break your loan application. For example, an FHA loan requires that the residence meet certain criteria. It fails, your FHA loan is refused. As a result of the faulty investment, an appraisal examination may find severe issues such as a bad foundation.
To avoid this, walk around the home in person and carefully read the housing disclosures. Get a home inspection early to save time.
7. You Have A History Of Missed Mortgage Payments
If you’ve previously owned a home, your underwriter will require proof that you’ve made on-time mortgage payments, otherwise they may not accept your loan for this new home.
A short sale or foreclosure on your record may also delay approval.
8. The Appraisal Is Too Low
A lender cannot lend more than the home’s value. If the appraised value is less than the sale price, you’ll need to pay the difference or renegotiate. Unable to do either will result in denial.
The 3 Worst Types of Mortgages
40-Year Fixed Mortgages
One of the more recent additions to the plethora of loan options, the 40-year fixed mortgage stretches out the typical 15- or 30-year loan to 40 years, meaning unwieldy amounts of interest over the life of the loan. Finance gurus at Investopedia recently showed that a 40-year loan will cost a homeowner approximately $107,000 more on a $200,000 home than a conventional loan with shorter terms.
Adjustable Rate Mortgages
Warnings about these so-called “ARM” loans abound – although the initial teaser interest rate may be a fantastic deal, it won’t last. Adjustable Rate Mortgages feature an interest rate that readjusts periodically, sometimes as often as each month. This means your payment will change frequently, many times becoming higher than anticipated. It can be difficult to budget when your largest expenditure each month is a variable amount, so think long and hard before entering into an ARM loan contract.
Interest-Only Mortgages
Interest-only mortgages typically feature terms that require nothing more than interest payments for the first five or ten years of your loan. These loans are attractive because, when you’re only paying the interest on a home loan, monthly payments are lower than with a conventional loan that also calculates a monthly payment on the principal. What this means down the road, however, is that you’ll have a much shorter time to pay off the principal, meaning significantly higher payments in the future.
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