Top 5 Reasons a Mortgage is Declined

Top 5 Reasons a Mortgage is Declined

Published by: Allaham Consulting, March 9, 2018

Whether you are planning to buy a new house or thinking about refinancing, home mortgage loan approval is the most dreading part of this whole process for a majority. Having your mortgage approved before heading out for your home shopping is essential. That way you will know your budget exactly and will explore only those choices you can afford.

But, getting a “Yes” from the lender is not a piece of cake; a denied mortgage application is the most common reason behind failed real estate deals. In fact, around 650,000 mortgage applications are rejected annually.

A rejected loan is indeed a huge disappointment, but do not let this stop you from pursuing your dream home. Take lessons from experience, pinpoint the flaws of your financial life, improve them, and send the request again.

Following are some common reasons your bank turns your application down. Check these out and follow our suggestions to overcome these hurdles.

Poor Credit History

The most common reason for a declined mortgage application is poor credit history. Lenders look at your credit history to evaluate whether you will be capable of paying back the money or not. Besides the credit scores, lenders also look for remarks such as bankruptcy or foreclosure on the credit report. Minimum credit score on the FICO scale agreed upon by most of the lenders is 620. Anything lower than this won’t get you a home loan.

You can assess the credit score and its calculation yourself and understand what you need to do about it.

Improving your credit score is not difficult; you first have to weigh up the possible reasons behind low score and then take measures to improve it. Credit reference agencies help you keep a check on your credit score.

Though credit history builds gradually with time and any negative mark will last as long as six years on your credit file, but still, there are some quick tips you may follow to start improving your credit rating instantly.

  • Register yourself on the electoral roll.
  • Recheck your credit file. Minor mistakes like a wrong phone number or even address can affect your credit
  • Always pay your landline and internet bills on time.
  • A linked account with the spouse or family member can cause low credit ratings. Check this as well.

New Credit Card Or Personal Loan

Taking a personal loan for your car or opening a new credit card right before filing the mortgage application can become a key reason for its rejection. That’s because the bank always monitors your debt-to-income ratio and assesses whether the debtor is a risky investment or not. If the debt-to-income ratio is 40% or above, lenders won’t take the risk of permitting your loan. You can quickly calculate your debt-to-income ratio by adding up all your monthly debt payments and dividing them by your gross income.

However it’s not difficult to evade this hurdle; monitor your loan and credit card history, don’t apply for personal loans or get a new credit card during the six months before your mortgage application.

Employment History

You should have at least two consistent years of employment before you apply for a mortgage. Most lenders keenly observe your employment history, and most follow this criterion. They want to make sure that the person they are lending money has a bright future and is capable enough to pay back the money. An inadequate employment history can lower the chances of your loan approval.

To avoid this, try not to change your job during the process. In case, you get fired, or a job change is inevitable, request your employer to verify your employment, issue the offer letter, and pay stubs to help you qualify for the approval. Your job history is important and it will help if you have a stable career to back you up.

Job change is problematic for less-portable professions. Otherwise, for those pursuing profession like medicine, dentistry, education, etc., a new job might not create hurdle in the loan sanction process as their future is secure no matter what.

A Monetary Gift

Yes, a substantial monetary gift can cause your mortgage application to be declined. Experts advise not to accept financial contributions two months or more before filing your mortgage application. The lender will be looking into your credit history, and any significant deposits in your account will raise red flags unless they are from obvious sources like an annual bonus from your company.

But if you are taking help from family members or friends for the down payment, make sure that its “acceptable” by the lender, as different lenders have different criteria which vary with the type of loan.

Wrong Property

A declined loan is not always due to homebuyer’s fault. Sometimes the wrong choice of property can result in rejection. Lenders sometimes don’t find the property valuable enough to sanction loan and are often reluctant to finance second homes or investment properties. But there’s a way out.

First, check out other lenders or banks; property rejected by one bank can draw a loan from another bank because of difference in policy and laws. For investment homes and second homes, lenders often have a stringent policy such as a high down payment, more cash reserves, and high credit score. Fulfill these conditions to get the loan.

Buyers often get lured by condos in their early selling phase believing it’s a fantastic bargain, but lenders look at the other side. They won’t sanction mortgage unless the one you’re looking at is on the FHA’s list of approved condos and till the sale of 70% or more units. Thus, to avoid the trouble later, ask the lender whether the project is approved before giving any down payment.

If you get your home mortgage loan declined, don’t lose heart after the first attempt. Whatever is the reason behind the rejection, discuss it first with your loan officer. Take notes and work on its improvement. It might take some time to make your application perfect, but eventually, you will secure a loan through smart management and improved credit history. It is always better to get all the information beforehand, making sure you meet all the criteria set by the lenders and then applying for your mortgage.

There are various reasons why your loan could be declined so it is best to keep yourself in the loop:

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Top 5 Reasons a Mortgage is Declined

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