When it comes to buying a home, most of us cannot afford to buy a property with cash. Applying for a mortgage loan is the reality for the majority of buyers, and it’s a process with several requirements. While no one wants to be denied, it can happen. Here are some of the top reasons why your mortgage loan application could be denied.
Poor Credit History
Credit history is a record of how a person repays debts. It’s a way for a lender to gauge whether a person is a risky investment or not. A credit report is a record of the borrower’s credit history from sources such as banks, credit card companies and collection agencies. A person’s credit history will also show whether they’ve had a foreclosure or bankruptcy. If your credit report shows that you have a lot of outstanding loans, haven’t been consistent on your payments, or have had a foreclosure or claimed bankruptcy, it could impact your ability to get a mortgage loan.
Insufficient Debt-to-Income Ratio
When applying for a mortgage loan, a mortgage lender will assess your debt-to-income ratio, which compares how much you owe each month to how much you earn to gauge your ability to afford a mortgage payment. A debt-to-income ratio is calculated by adding up all monthly debt payments and dividing them by one’s gross monthly income. If the numbers fall short of a healthy debt load, it’s likely your mortgage loan application could be denied.
Inadequate Employment History
Employment history is a big factor in mortgage loan approval. Many lenders require proof of steady income and will want to see employment history and income for the past two years, which is the standard for many lenders. If you cannot provide proof of employment to the lender, or you have periods of unemployment, you may be at risk in securing a mortgage loan.
Down Payment Is Too Small
A down payment is the part of a home purchase that is paid up front by the buyer and does not come from a mortgage lender. Many lenders will consider a down payment as an investment in the home, so low down payments can put some lenders on alert.
It is important to note that depending on the type of loan, such as a conventional loan, a down payment less than 20% may require private mortgage insurance to protect the lender if you default.
There are other types of loans that offer no-down (VA) or low-down payment mortgage loans but for a majority of lenders, a low down payment can be a red flag. Also, keep in mind that these loans vary widely in their requirements, terms, and availability.
Appraisal Comes In Low
Sometimes buyers have all their bases covered but the mortgage loan is still denied because the property’s appraisal of the property’s market value is less than the loan amount. Some buyers will have enough cash to cover the difference between the asking price and the loan amount, but other buyers may have to walk away from the deal if the seller isn’t willing to lower the sale price.
Take Action and Stay Alert
If you are considering buying a home and you know you’ll need a mortgage loan, consider getting pre-approved prior to your home search. Prior to approval, check your credit history and run a credit report to make sure you’re in good standing. Review your finances, including your monthly income and expenses. Ensure you have your tax returns from the past few years and that you can prove consistent employment. If you can, start saving for a down payment.
Also be aware of the “Gotta Get” trap, which can potentially deny you a loan. It can be tempting to buy new appliances or other large items for your new home while you wait to close, but adding to your debt-to-income ratio or drawing down your cash reserves while in escrow can cause your lender to deny your loan. If you know you will need new furniture, appliances or any other major items, wait until after closing is done to make the purchases.