Common reasons why your home mortgage loan application could be denied:
Having your mortgage application denied can be a frustrating experience. When you feel ready to buy a home but lenders don’t seem to agree, you’re going to want to understand exactly why you can’t get approved for a home loan. So if you’ve ever wondered nor asked any of theses questions;
What stops you getting a mortgage
Can I get a mortgage if I have no proof of income?
Can you get a mortgage, even after being refused?
At least one of the explanations below will probably describe your situation in more detail than your loan rejection letter provided.
Mortgage Refusal Reasons
Low Credit Score
You will need a credit score of at least 620 to qualify for a conventional mortgage.
Poor Credit History
Your credit history is a great way for a lender to tell whether you’re a risky investment or not. 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. But unless your credit is in really bad shape, 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, such as 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. And more often than not, time is the only thing that will help.
No Credit History
If you have no official credit history, you can still qualify for a mortgage using nontraditional credit. Fannie says you can show two to four sources of proof of steady payments not typically reported to credit bureaus, such as rent, insurance or utility payments, and still get approved. But if you have neither traditional nor nontraditional credit, you will not be approved.
Your ongoing, stable income must be high enough to support the housing payment you want to take on after subtracting your ongoing financial obligations (debt and other liabilities).
Employment History Too Short or Unstable
Lenders want to see a history of stable and predictable wage or salary income, ideally with at least a two-year history. You also can qualify with many other types of income, including long-term disability, interest and dividends, public assistance and retirement income. If it’s unclear whether you can hold down a job or receive a consistent income, you’ll need to build a longer history.
Insufficient Documentation of Income or Assets
Lenders require documents such as pay stubs, W-2 forms, bank statements and tax returns to prove your income and assets. If you can’t provide these documents, your loan will not be approved.
Your lender may require you to show that you’ll have a certain number of months’ worth of housing expenses in checking, savings, investment or retirement accounts after your mortgage closes.
Assets Not Seasoned
Large deposits that haven’t been in your account for at least two months can be evidence that you recently borrowed money to afford your down payment or meet reserve requirements. Lenders will require proof of where the money came from—a gift letter from a relative, proof that you just sold your car—to show that’s not the case.
Property in Poor Condition
With a standard conventional loan, you can’t finance a property that is unsafe or structurally unsound because it has been damaged or poorly maintained. These issues have to be corrected before a lender’s underwriter can approve a mortgage for the property.
Not a U.S. Citizen or Illegally in the Country
You must be a U.S. citizen or legal permanent or nonpermanent resident with a valid Social Security or tax identification number to be approved for a mortgage.
Too many late payments will harm your credit score, possibly to the point where it’s too low to qualify. And you can’t get approved while you have overdue payments outstanding.
If you have an existing first or second mortgage that is 60 days or more delinquent, your application may be denied.
You must be legally old enough to enter a mortgage contract (age 18 in most states).
Insufficient Down Payment
You will typically need a down payment of at least 3% to buy a home with a conventional mortgage. If you can’t afford a down payment, you may be able to apply with Community Seconds or Affordable Seconds financing, however.
It can be devastating to have your mortgage suddenly denied after you thought you were clear to close. If your mortgage loan got denied after you received your closing disclosure, it could be that you made a last-minute mistake like applying for a new credit card, financing furniture for your new home or making some other financial move that threw off your DTI ratio or credit score.
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.
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. Don’t be scared of the inevitable down payment. Start saving now.
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.
If you’ve been denied for a home mortgage loan, chances are it was because of one of the above five reasons. Don’t be deterred, with a little patience and extra work on your end, you can put yourself in a position to get approved the next time you apply. Once you have secured your loan, don’t stop working to improve your credit. You may be able to refinance for an even lower interest rate.
Credit Report Errors/Identity Theft
Sometimes, the reason your credit score is too low is that you have an error in your credit report or have had your identity stolen and damaged. The resulting inaccurate information in your credit reports can prevent you from qualifying for a mortgage.
Too Many Recent Inquiries for New Credit
Lenders will consider you a higher-risk borrower if you have been applying for lots of new credit recently, even if you didn’t accept all the credit you were offered—but especially if you did.
A foreclosure on your credit report means you’ll have to wait three to seven years to be eligible for a conventional loan. The lesser offenses—deed in lieu of foreclosure, short sale, charge-off—require a two- to four-year waiting period.
Judgment or Lien
Outstanding judgments and liens must be paid off before closing, so if you don’t have enough funds to pay them, your lender will reject your application.
Depending on the type of bankruptcy and the conditions that caused it, you will have to wait two to five years after discharge or dismissal to be eligible for a conventional loan.
Still, the shorter end of the range to become mortgage eligible after a foreclosure or bankruptcy applies only to extenuating circumstances such as divorce, high medical bills or being laid off from work. Evidence of your misfortune and subsequent turnaround can help you get a mortgage approval sooner.
Student Loan Debt in Forbearance or Deferment
What’s going on when your student loan payment is currently What’s going on when your student loan payment is currently What’s going on when your student loan payment is currently $0 because you’re in forbearance or deferment because you’re in forbearance or deferment because you’re in forbearance or deferment, but your lender says you don’t qualify because of your student loan? How can you get denied based on a payment that’s not affecting your monthly obligations? Since your payment won’t be $0 forever, your lender will factor in a future repayment based on your loan balance and terms.
Debt and Other Liabilities Too High
Add the housing payment you want to take on to all your payments on credit cards, installment loans with more than 10 payments remaining and other debts with recurring payments. Then add any child support or alimony you pay. The total can’t exceed 50% of your income. Depending on your overall financial picture, sometimes the maximum is only 36% or 45%.
When calculating your debt-to-income (DTI) ratio, be aware that your lender’s calculation of your housing payment includes not only the principal and interest you’ll pay on your mortgage, but also homeowner, flood and mortgage insurance premiums, as well as property taxes and homeowners association fees.