That’s right, you read us correctly. A whopping 29 reasons mortgages get denied. But not to fret, the reason we’re sharing all these possible disappointments is so you can get educated and AVOID them.
No one likes getting denied, especially when it comes to a mortgage. If you’ve ever been denied for a mortgage or are starting the process of buying a home, you may be wondering how to avoid rejection.
1. You made a large purchase recently
The key here is recently. Mortgage lenders are going to evaluate your overall financial worthiness, with the idea of assessing whether or not you can make your mortgage payments. Large purchases, right before you apply for a loan (or even worse, during a loan application process) can cause a problem because you’re moving around money, potentially changing your overall asset situation.
2. You just opened a new credit card
Just like a large purchase, a credit card can change your debt to income ratio. With a credit card, you may not have run the balance up, but a lender will factor in your ability to do so, because if you do, it could be another bill in competition with your mortgage. The general rule of thumb is don’t take out any new debts, including loans of any type and credit cards, for at least six months prior to your application.
3. You just got a personal loan
Personal loans – for anything – will change your debt to income ratio, which is a key factor for lenders when they decide to approve you for a mortgage loan. If you’re not familiar with your DTI, as it’s known, learn more about how it works here. In a nutshell, your total bills are measured against your total income so adding a new bill, like a tv or car, can upset your ratio, and your ability to get approved.
4. Your job status changed
Whether you’re celebrating a new job or were just let go, your mortgage could be denied. Most lenders like to see at least two years of steady income with your employer (or at the very least in a similar role) so any changes, even if positive, could cause a problem. If you’re planning on making a job change, keep this in mind because most lenders will verify employment as late as your day of closing.
5. You’ve been missing debt payments
A solid ten years of great history won’t help you if you’re experiencing trouble lately. Not only will late payments lower your credit score, they’ll also reflect poorly on you as a potential borrower. If you can’t make your payments on time before you have a mortgage, the chances of a bank wanting to lend you more are slim.
6. You accepted a monetary gift
We all like the idea of free money, but it could be the reason your mortgage gets rejected by an underwriter. Just because you have money in the bank doesn’t mean your underwriter won’t investigate where it came from. And the bank wants to know YOU can afford the mortgage, not just with the help of your friends and family. If you are applying for a mortgage that allows financial assistance, be sure to document where the money came from and for what purpose.
7. You moved a large amount of money around
Just like receiving money, moving money may raise red flags. Don’t try to combine your money into one account or make any substantial transfers as you get closer to your application process. Keep any transfers to less than $1,000 and be ready to explain (with documentation) the purpose of those transactions.
8. You overdrafted a checking account
If you’re someone who likes living life on the edge, now may be the time to make an exception. Leave enough money in your account to cover any unexpected surprises because an over drafted account is a big problem if you are applying for a loan. Simply put, the lender wants to know you are financially stable and secure, and over drafting an account sends the opposite message.
9. You left something off your loan application
Your lender wants to know all about you, including all the money you have and owe. Skipping important details in these sections can cause alarm unnecessarily. The chances are high that your underwriter will find everything anyways so be up front, even if you’re worried it may look unfavorable. It’s better they have all the details and can work with you, then find out too late and have your mortgage denied before or at closing.
10. Your credit isn’t good enough
Your credit score is a key component in your ability to get a home. The good news is that you can begin working on it before you apply, by making timely payments and paying off debts as you’re able. Typically, the lowest score you can get by with is 620 or more. So, take a hard look at your numbers and make a plan to improve if you think your credit may be an issue.
11. Your debt to income ratio (DTI) isn’t good enough
We mentioned this little number above, and we can’t stress it enough. Your debt to income ratio is what lenders look at along with your credit. If you take all your monthly payments, add them up and divide that number by your monthly income, you’ll get your DTI percentage. Aim for 45% or less, the lower the better.
12. Insufficient income or asset documentation
If you make a lot of money or have tons in the bank, congratulations. However, if you can’t show where it came from or produce regular documentation, that could be a problem. A simple example could be that you’re self-employed. You have the money in the bank, but it doesn’t seem to add up on tax returns. This situation could raise a red flag and result in being denied.
13. Your down payment is too small
Any lender wants assurance that you can pay the mortgage and a strong indicator of your ability is what you bring to the table. If a lender decides that your down payment isn’t enough, it could mean they won’t accept the loan application. If you’ve experienced this, talk with your mortgage broker to understand what amount you should have for your next application.
14. You experienced problems with the appraisal
An appraisal is the industry practice of having an independent authority estimate the value of your new home. Just like you wouldn’t want to pay $10,000 for a car worth $5,000, the bank doesn’t want to secure a house with their money if it’s not enough collateral. If your appraisal comes back in too low, you have options. Talk with your realtor to get the guidance you need in this situation.
15. Blindsided by new laws or guidelines
When you’re buying a home, you’re subject to local, state and Federal guidelines. Choose professionals in your area who stay up on these rules. They’ll help guide you through the process and make sure you’re getting information consistent with new laws. Guidelines could also change for your lender so what was acceptable when you submitted your application could change, meaning your mortgage could be denied after pre-approval. Again, working with experts in these matters will give you the best chance to stay ahead of any changes.
16. Inconsistent employment history
Self-employment or job hopping can both be challenging to overcome with mortgage applications. It’s best to stay employed with the same company for at least two years, and to have documented self-employment income for longer if that is the case. The more you can show you can pay a mortgage with a steady income, the better chance you’ll have of being approved.
17. You didn’t completely erase an old debt
Just because it’s been a while since a debtor called you doesn’t mean they might not be off your credit report. It’s worthwhile to pull your own credit history before you make a loan application, so you can work to clear anything that might cause alarm. Even if you end up with a payment arrangement, it will be better than showing that you never paid something off or showing that you last made payments a few years ago then quickly updated to “paid” overnight.
18. Unpaid taxes
This is another debt that can come back to bite you and could mean a solid denial to your mortgage application request. The IRS can garnish your wages and lien your property, not exactly appealing to a potential new lender. Work through these old debts before you apply – even if you sign a payment arrangement to work through it over time.
19. You picked the wrong bank or lender
Don’t just settle with your local bank because you’ve had an account there for ages. Do your research and apply to multiple banks, directly or with the help of a mortgage broker. Just because one bank has a certain set of guidelines and requirements, doesn’t mean anyone else will. Give yourself the best chance of success and apply more than one place.
20. You didn’t shop around
Just like sticking with one bank may backfire, so will working with only one broker, realtor, loan officer and more. Before you commit to your team of experts, take the time to reach out to a few and get a sense of who has the most knowledge. These are the people who will be in your corner, so choose carefully.
21. Inexperienced loan officer or broker
If you don’t take your time to choose someone with experience, you could be shooting yourself in the foot. Working with someone who has done this a while, means they’ll know what options you have if you something comes up in your file. This isn’t the time to choose someone because you were roommates in college, find someone that’s seen it all, and better yet, knows how to work around it!
22. You chose the wrong type of home
Did you know that not all loans are the same? And neither are all properties. If you choose to apply for a second home or investment property, expect much stricter guidelines than if you’re buying your first home, where you plan to live.
23. You have business debt
Just because you have a business operating under a DBA, doesn’t mean it won’t show up during underwriting. Being personally responsible for a business (like a sole proprietorship) means your application will involve looking at your business. If you have debt there or appear to be struggling, expect some trouble getting a home loan.
24. You owe child support or alimony
These payments are factored into your debt to income ratio because they are mandatory expenses. As you work with your mortgage broker, be sure to disclose these payments to avoid finding out later that they may be too much to qualify you for a home loan.
25. Your tax write-offs were too high
If you work for yourself or as a contractor, it’s great when you get to write expenses off. The problem occurs if you wrote so many expenses off, it appears that you’re not making any money. Your net income will be used to qualify you for a loan application so keep that in mind when you file taxes.
26. You asked for too little money
It seems counterintuitive, but if you ask for too little, you could be denied. This is because banks make their money off the interest, which is much higher on a loan of $300,000 than it would be for a loan of $10,000. They’ll be factoring their profit against their risk, so it’s unlikely they’ll approve a loan for less than $50,000.
27. There’s a change in interest rates
The interest rate is a factor in getting approved so if it changes dramatically from the day of your application, it could upset your approval. A simple way around this is to take advantage of “locking in” your interest rate when you apply.
28. Errors on your tax return
If you unintentionally (or intentionally) made errors on your tax return, your application could be in jeopardy. Aside from major life changes, like you weren’t married and now you are, there could be heavy penalties for unpaid taxes, which means you may have another bill that will count against you.
29. You don’t have enough savings
Along with your down payment and ability to pay off the mortgage, having assets left over is in your favor. If you don’t have any savings to weather bumps in the road, the lender may consider your situation too high of a risk. Factor in six months of expenses as you begin to save for a house.
There you have it! 29 Things to watch out for as you plan your exciting home purchase. Each one is different so don’t worry if you don’t have everything perfect before you begin the process. There’s no rush – wait until you’re ready, confident and have as much as you can in order. Once you start the application, be prepared to fully disclose your financial details from top to bottom. Honesty is the best policy. We’ll help you every step of the way, from knowing how much to save to having the best experts in your corner. To learn more about our mission and how you can get started, click here.