Top 4 reasons why mortgage applications are denied



1. Debt-to-income ratio

Whether you go through a traditional bank or a mortgage lender, your debt-to-income ratio is one of the most important elements of your mortgage application. This ratio is a simple measure of how much debt you carry expressed as a percentage of the amount of money you earn before taxes and deductions each month.

To figure out your debt-to-income ratio, add up all of your monthly debts (including student loans, car payments, credit card bills, and other loans with fixed payments, but not including utilities bills and other variable monthly expenses) and divide it by your gross—or pre-tax—monthly earnings. Most mortgage lenders are looking for a debt-to-income ratio that doesn’t exceed 45 to 50 %, and that includes the mortgage payment you are applying to take on.

If your debt-to-income ratio is too high to consider taking out a mortgage at the moment, that’s a good sign that it’s time to focus on paying down debt before doing any serious house-hunting.”


There are some exceptions to the 45% to 50% rule, but in general, this is the number you want to keep in mind when you do your initial debt-to-income ratio calculations. Not only does this tell you whether you are carrying more debt than most lenders are willing to work with, it will also tell you how much mortgage you can realistically hope to borrow. By paying off any one (or more) of your debts, you’d free up more money to go toward a potential mortgage.

If your debt-to-income ratio is too high to consider taking out a mortgage at the moment, that’s a good sign that it’s time to focus on paying down debt before doing any serious house-hunting.

2. Credit score

This is another biggie. As you probably know, credit scores are used by lending institutions to assess each individual’s creditworthiness based on their financial history, including payment history (on-time versus late or missed payments), total amount of debt, length of credit history, and other factors. Credit scores, which are measured slightly differently across three major reporting agencies, range from 300 to 850 and are considered to be an at-a-glance measure of the trustworthiness of individual borrowers.

In general, credit scores below 620 are typically considered subprime and may make it more challenging to get a mortgage, especially with the most competitive interest rates. (If your credit score is in the subprime category, you aren’t alone: as of 2015, a little over half of American consumers—56%—were found to have subprime scores.)

Those with lower credit scores may still be able to get a mortgage—it will likely just require more shopping around (and having more cash on hand for a down payment is helpful, too). While Fannie Mae and Freddie Mac each require a minimum credit score of 620, the FHA has more forgiving parameters, making FHA loans a better bet if you are in credit-repairing mode.

FHA loans were created in the 1930s to make homeownership more widely accessible, and their guidelines stipulate that credit scores as low as 500 may be accepted with a 10% down payment. Credit scores of 580 or above, meanwhile, may be eligible with as little as 3.5% down. Remember, though, that you will need to identify lenders that don’t apply additional credit score overlays on top of these minimum requirements in order to actually score a mortgage with the lowest required scores.

Keep in mind, also, that anytime you apply for a new loan, you’ll typically accrue a “hard inquiry” on your credit report as your potential lender checks out your credit history. Too many hard inquiries can negatively impact your credit score, so if you know you will be applying for a mortgage soon—or if you’ve already been pre-approved for a mortgage—you’ll want to avoid applying for any other loans (like credit cards or car loans) until after you’ve secured your mortgage.

3. Employment history

Your employment history is another major factor when it comes to your mortgage application. In general, most lenders want to see at least two years of consistent of employment history at the time you apply for your mortgage.

Requirements may differ depending on whether you are paid a salary versus hourly wages, work part-time versus full-time, and whether you are employed or self-employed. Note, too, that different lenders may handle income from things like a second job and overtime differently; these sources of income may not always be allowed to count toward your overall income on your mortgage application. Given these variables, you should be sure to tell potential lenders the details of your employment situation at the outset to make sure you don’t hit any unforeseen bumps in the road.

If, after approaching a handful of lenders, you find that your employment history is a little too spotty, now may be the time to focus on remaining consistently employed for a year or two before applying for a mortgage.

4. Appraisal issues

Occasionally, a mortgage application may be denied because of issues with the property itself and how it is valued rather than your own personal information.

Remember that the sale price of a home may not always correspond with the appraised value of the home. The appraised value is based on local comps, or other comparable houses that have recently sold in the same area, and other factors. Because the house you are buying will be used as collateral against your home loan, lenders use appraisals to confirm that the mortgage amount you are requesting is in line with the actual value of the house. If the appraised value is significantly lower than the agreed-upon sale price, you’ll either need the seller to come down off their price, or you would need to pay the difference out of pocket.

Note that especially unique properties—think geodesic domes and other, less striking examples—may come up against appraisal issues because of a lack of relevant comps.




Have Questions or Need Expert Advice? Text, email, or call me below:

Joel Lobb
Mortgage Loan Officer
Individual NMLS ID #57916

American Mortgage Solutions, Inc.
10602 Timberwood Circle
Louisville, KY 40223
Company NMLS ID #1364

Text/call: 502-905-3708
fax: 502-327-9119
email: kentuckyloan@gmail.com

http://www.mylouisvillekentuckymortgage.com/

The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people.
NMLS ID# 57916, (www.nmlsconsumeraccess.org).