Applying for a mortgage can be a daunting experience for first time homebuyers. The worst part is the recurrent feeling you get while you’re waiting to learn whether you’ve been approved or rejected for the mortgage. Even after, you’ve selected a good lender and provided all the relevant and important documents, there’s still a possibility that you may be rejected.
Based on views expressed by highly recommended mortgage brokers, here are five most common reasons why mortgage applications get denied. Though some reasons won’t be must surprising to you, some are less obvious and could save you from making a dire mistake.
1. No or poor credit history
This is by far the most critical and common reason why mortgages aren’t approved. According to Gus Fotopoulos of Quontic Bank in New York, mortgage markets today is pressured by secondary markets and mortgage regulators have become very specific about credit scores. So, if your credit score is below the desired threshold, then you’ll not obtain the mortgage.
So does this mean that you won’t obtain a loan if your credit score doesn’t meet the required threshold? Well, not necessarily, says Matt Hodges with Presidential Mortgage Group in Charlottesville, Virginia. He said that homebuyers will get a mortgage, even with a credit score of 619, but they need to pay off some of their debts before the mortgage deal is closed.
However, keep in mind that your credit score isn’t just checked at the time you apply for a mortgage, instead it’s reassessed throughout the process. So, mortgage brokers advise homebuyers to avoid buying big money items like a car or furniture on credit for the time being between submitting your mortgage application or when the deal is closing.
2. High debt-to-income ratio
The second most common reason mortgage applications are rejected is when prospective borrowers have too much debt compared to their income. Fotopoulos said that the problem is that people is either buying something they can’t pay for or can’t show enough income on paper even if they can afford it. It’s a mix of lack of income and overextension of outstanding personal household debt.
So what’s the limit? For Fannie Mae and Freddie Mac, debt-to-income ratio should be within 45% to 50% of gross monthly income, while for HA, it’s 56.99%.
3. Not sufficient “qualifying income”
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So, it’s important to keep track of your income source. Nowadays banks guidelines require any large and non-paycheck deposits (normally over $500) should be sourced with invoices, supporting bank statements, and explanation letter etc.
4. High “layered risk”
Even though the mortgage approval process is mostly quantitative and objective, there’s still some qualitative and subjective piece attached to it. Even if a automated underwriting engine, either Fannie Mae’s appointed underwriter or Freddie Mac’s loan prospector “approves” or “accept” a finding, an underwriter can still disapprove that decision on account of various negative factors, according to Hodges. These negative factors include “payment shock”, (the situation where mortgage payment is higher than rent payment), self-employment, short employment period, limited credit history, money for closing the mortgage comes as a gift, or/and limited reserves after closing.
5. Change of job midstream
Another thing that can affect your chances of getting a mortgage is changing or losing your job in the period you apply for a mortgage and closing the deal. As I have said earlier, the fewer things you change during this time period the better. This not only applies from avoiding purchasing a car or furniture on credit but applies to other things as well. In addition in changing or losing your job, changing the terms of your mortgage can also lead to your mortgage application to get denied. For example, the original contract required a 20% down payment, but later the borrower decided to keep more liquid assets for incidentals (furniture, a fridge, television, etc.).
The bottom line is applying for a mortgage isn’t a good idea for anybody. However, if you consider taking the advice, applying for a mortgage will be less of a burden to you.