If you’ve just had your application for a home mortgage loan declined, it can be seriously disappointing.
Applying for a mortgage can be hard work in the first place, and now you feel like you’re back at square one. But don’t dwell on it – instead, take it as a learning opportunity!
Don’t feel like you’re alone, either.
Around 14.5 percent of all home-purchase loan applications and 22.7 percent of refinance applications were denied in 2013.
The next time you apply for a mortgage loan, you’ll be better prepared to be approved – especially if you check out these 5 reasons why your mortgage application may have been declined in the first place.
5 Reasons You May Have Had Your Mortgage Application Declined
1. Bad Credit History
One of the most common issues prospective buyers run into when they have their mortgage application declined is a poor credit history.
When lenders consider a mortgage application, they take two aspects into consideration: minimum credit score and the presence of significant derogatory credit items.
In other words, they look to see how grim a picture your overall credit history paints.
These days, nearly every lender considers a FICO score of less than 620 to be too low to qualify for a mortgage. Depending on your individual circumstances and the equity of the property, that number might be even higher.
If you have very derogatory credit, like a bankruptcy or foreclosure in your history, you’ll need a long period of reestablished credit – usually four to seven years – before a bank will come near you.
So before you pull your hair out wondering why you were declined, it’s important that you know where you stand credit-wise. Check one of the numerous free or low-cost resources available to research your credit history and credit scores, like the federal website, www.annualcreditreport.com.
2. Poor Employment History Verification
If your employment history is, shall we say, inconsistent, a lender might think twice before approving your home loan.
Because consistent and impressive employment history can be extremely valuable when it comes to securing a mortgage. Lenders only want to loan money to those borrowers who are most likely to pay back their home loans on time.
For instance, if you’ve worked in the same field for several years, you’re far less likely to lose your job. And the more likely you are to remain employed, the more likely you are to continue making your mortgage payments every month.
So, when you apply for a mortgage loan, provide as much paperwork as possible to your lender. This includes:
- Your two most recent paycheck stubs
- Your last two years income-tax return statements
- Your two most recent bank account statements
- Proof of employment (usually in the form of a signed statement from your employer or supervisor)
You could have an 800 FICO score and millions of dollars in your bank account, but if you can’t properly back it up with your tax records, a lender won’t touch you with a ten-foot pole.
3. Weak “Compensating Factors”
If your mortgage application has some significant issues or you’re on the borderline of qualifying, you can strengthen your application with compensating factors.
A compensating factor is a fancy term for some positive aspects of your current situation that offsets the more negative aspects. Some examples of compensating factors include:
- A down payment of more than 20 percent
- A loan-to-value ratio less than 80 percent
- 12 months or more in cash reserves
- A credit score above 740
If you’re already not the strongest candidate for a loan and you don’t have any of these compensating factors, your application will probably be declined before you can say: “High debt to income ratio.”
4. A High Debt to Income Ratio
Debt to income ratio is the percentage of your monthly gross income that can be devoted to servicing your monthly debt payments.
Lenders typically want you to pay no more than 38 percent of your monthly income toward your debt. Some show a little more flexibility and allow up to a maximum of 45 percent – but only if you have excellent credit, a large accumulated savings account, or a high level of equity in your current home.
If your debt to income ratio exceeds 38 percent, you need to consider ways to eliminate excess debt to reduce the ratio before you apply for another mortgage.
5. Wrong Type of Property
The reason you failed to secure a mortgage from a lender might actually have nothing to do with you. It could be simply because the property would be a second home or an investment property – something that sets off alarm bells for lenders.
It’s not that funding isn’t available for these buildings. The issue is that they carry more stringent terms, like bigger down payments and more cash reserve requirements.
And sometimes, the reason you see your mortgage application declined is because the property’s value isn’t high enough to back the amount of the mortgage loan you applied for.
Lowball appraisals tend to throw a wrench into mortgage applications. Fortunately, you have the right as a borrower to ask for an appraisal rebuttal – but this rarely results in a higher appraised value for the property in question.
Your best bet is to shop multiple lenders to find one who will work with you regardless of a low appraisal value. When you have your mortgage denied, simply determine what went wrong and try to find a bank with more liberal guidelines, or ask for an exception.
Your Next Step
If you’ve had your mortgage application declined, the first thing you should do is find out the exact reason for the denial.
Once you’ve been denied a mortgage loan, the lender is required to provide you with a letter of denial called an “adverse action notice” that specifies the reasons for your loan not being approved.
If you can fix the problem right away, your lender might approve your loan. If you need some time to fix it, take action immediately to get your loan approved.
Sometimes, it can be something as simple as your employer failing to verify your income, or some misplaced tax return documents. You never know – so find out fast and take action as soon as possible.
Above all, be sure you do your due diligence. Do your homework and familiarize yourself with your general options and terms as much as possible before you apply again.
And if you need some more outside-the-box thinking to come up with the best possible solution, consider professional help from an experienced real estate agent!
Contact me today if you have any questions about securing a home mortgage (or anything else!) on properties in the Austin, Ft. Hood, or Killeen area.