Top Ways to Avoid Getting Turned Down for a Mortgage
Want To Know Why You Were Declined For a Home Mortgage Loan?
Being declined for a home mortgage loan is a BIG disappointment. Here at Dwell Realty we want to support you getting past this period and heading towards success the next time around. Use this one as a learning moment.
Understanding why you were declined for a home mortgage loan can be a valuable learning experience because it allows you to recognize and pinpoint certain areas of your financial life that need improvement. The good news is that just because you were denied once, doesn’t mean you will be denied again and again. And because lenders are required to detail the cause for denial in a formal rejection letter, you’re given all the information you need to correct your situation.
Here’s some of the main reasons why your home mortgage loan application could be denied:
Poor Credit History
Lenders look not only at your minimum credit score, but also at whether you have a significant amount of derogatory remarks on your credit report such as a foreclosure or bankruptcy. Unless your credit is really poor, you should be able to get approved for a mortgage loan. Today most lenders will consider a FICO score of less than 620 to be too low to get approved for a mortgage.
Luckily for homeowners, information on your credit is easily attainable, through the federally mandated website, www.annualcreditreport.com. Only once you understand why your credit score is so low can you begin to correct it. Often it takes time and right action to repair it.
Insufficient Income/Asset Documentation
A lender can tell if you’re able to afford a mortgage payment by looking at your income to debt ratio. While in your head you may earn enough to pay your monthly bills and a mortgage, if you can’t adequately document this income then you will likely get denied for a home mortgage loan.
Make sure to keep an accurate record of your finances and assets and document all of your income. Also, be prepared to show tax returns from the past several years.
Make sure to ask your Dwell Realtor for a Mortgage Document Checklist to get your documents in order, as we’re here to help you have a successful outcome regardless of the the timeline.
55 Years and Older
Please remember if you’re over 55 and need a mortgage, the important thing to know is that lenders can’t deny you a loan based on your age. But age can factor into your mortgage equation. … The Equal Opportunity Credit Act prohibits lender discrimination for various protected categories, including the borrower’s age. Here’s an important CHICAGO TRIBUNE ARTICLE to review
You Retired Early
You may have achieved a nice bit of success and have decided to retire early and want to buy that dream home. It’s best to have a conversation with your financial advisor, mortgage broker, and real estate agent before you finalize the retirement. Despite your good financial standing and confidence that you can afford the mortgage payment, you might need a lot more cash to buy that home, as a larger down payment may be required. PLAN, PLAN, PLAN, and make this retirement the dream you wanted it to be.
“Many people work very hard to save and retire early, but have little income,” said Mark Ferguson, a real estate agent and investor who runs InvestFourMore. “Because they have little income, lenders will not want to give them a new loan.”
Down Payment is Too Small
A lender looks at the down payment as an investment in their future home, so a low down payment does little to put their mind at ease. Therefore bigger is always better when it comes a down payment to satisfy your home mortgage loan application.
Typically, homebuyers will have to pay down payments that equal 5–25% of the total value of a home, but there are certain federally backed home mortgage loans that don’t require a down payment whatsoever. SO START SAVING NOW! And discuss the best down payment plan with your agent.
Problems With the Property
A denial doesn’t always have to do with the homebuyer. Sometimes a property’s value isn’t enough to back the amount of the mortgage loan being applied for, and therefore is denied. It’s not uncommon for a lowball appraisal to throw a wrench into a mortgage application.
As a borrower, you have the right to ask for an appraisal rebuttal, but rarely does this result in a higher appraised value for the property in question. A good way to solve this is to shop lenders.
Inadequate Employment History
A consistent employment history can be a very valuable thing when applying for a home mortgage loan. In fact, many lenders require two years of consistent employment before signing off on a loan. The reason is they want to know you’re able to hold down a job long enough to pay back the money they’ve loaned you.
Be sure to have proof of your employment as well, such as pay stubs or tax information.
You Changed Jobs Too Frequently
Lenders like stability — and nothing screams “unstable” more than jumping from one position to another, and often times being an entrepreneur that doesn’t keep a “stable” income. You’ll need to stick around for at least two years, according to John Thomas, a branch manager at Primary Residential Mortgage.
“The guideline to get a mortgage loan is a minimum two-year work history as it provides stability in the eyes of the lender,” Thomas said. “We as the bank want to make sure the borrower has the ability and the stability to keep paying the mortgage payment every month, and a job history is one of the best predictors. You don’t have to be at the same job for two years, but there must be a pattern of continuing to work and stability.”
You Didn’t Establish Credit
If you haven’t established credit in your own name solely – you need to, and it needs time to season. “The underwriter will determine that the credit report is not an accurate reflection of your credit,” Thomas said. “If that happens, your alternative is to qualify for a manually underwritten home loan.”
You would have to provide alternate sources of credit and your debt-to-income ratio allowed would be lower, according to Thomas, but it’s always best to open credit in your own name as opposed to being an authorized user.
You Paid Debt but Didn’t Erase It
Paying off old debt can actually lower your credit score. This happens if the collection updates to “paid” with a date of today on your credit report and the last active report dates on the collection are two years old, according to Thomas. “It’s better to try to pay the collection and negotiate with the debt collection agency to have it removed versus updating the status,” he said. “Speak with a credit expert or a lender to see what should and should not be paid.”
Your Home Doesn’t Appraise for the Buying Price
“The lender requires an appraisal on the home because the home is the collateral for the mortgage loan,” Thomas said. “The home loan is based on a percentage of the appraised value. For example, if putting 20 percent down, the lender is lending you 80 percent of the purchase price or appraised value, whichever is lower. If the home appraises low, the lender is going to reduce the amount you can borrow.”
You will have 3 options at this point, according to Thomas:
- Bring the difference in purchase price and appraised value, which increases your down payment.
- Negotiate with the seller to lower the purchase price to the appraised value.
- Walk away if the first two options don’t work.
You Have Unpaid Tax Liens or Judgments
You might have forgotten about that old tax lien or judgment, but it’s still out there waiting to haunt your home loan application. “Having an unpaid tax lien or a judgment can cause your mortgage loan application to be rejected and can come up the week before settlement,” Thomas said.
“Just because an old tax lien or judgment is no longer reporting on credit doesn’t mean it went away,” he said. “Lenders are required to have a title search done prior to closing, and the title search will find any unpaid federal or state tax liens — as well as any unpaid judgments. If you don’t have the funds to pay them, you will not be able to close on the loan because title won’t be able to issue a clear title policy to your new home.”
You Opened or Closed a Credit Card at the Wrong Time
Lenders are required to either monitor your credit for new inquiries or pull a new credit report the day before closing, according to Thomas. “Either way, we will know if you opened new credit and if there is a new inquiry, the home loan must be re-underwritten with the new liability and the new payment,” Thomas said. “We must also obtain a new credit report with the liability. A new liability could lower your credit score and make you no longer qualify, or it could increase your debt-to-income ratio, also making you no longer qualified.”
You Have Business Debt
You might think your business finances are separate from your personal finances but if you have personally guaranteed any business accounts or loans using your own Social Security number, they will show up on your credit report and could cause your home loan application to be rejected. So, it’s important to stay on top of your financial planning and budgets while making these important mortgage plans. Let’s talk. CONTACT US for a meeting to discuss your specifics.
Hang in there! We’ll get you through the finish line. GIVE US A CALL TODAY!