Being denied for a mortgage loan can certainly be a disappointment, especially when you consider all the hard work you had gone through applying for it. When your mortgage application is denied, the best thing to do is to find out the reasons and remedies to improve the chances of approval.
According to the Mortgage Bankers Association, almost 30 percent of homebuyers who apply for a mortgage are turned down. Also, about 1 in every 2 applications for refinancing are rejected. Below are the top five reasons why your mortgage loan application could be denied:
- Poor credit history: A poor credit rating is the most common reason for mortgage denial. Your credit history is reviewed by mortgage lenders when looking at whether or not, or how much, to lend you. If you had problems paying your debt in the past, for example, on a credit card, personal loan, or even your utility bills, it will show up on your credit report and will very likely be the reason for a denial. This is because the lenders will consider you more likely to miss a mortgage payment or be unable to pay on time. Checking your credit report regularly will enable you to stay on top of what it contains and get any incorrect information fixed.
- Too much debt: A debt-to-income ratio compares your monthly debt payments, including your estimated monthly mortgage payment, to your monthly income. It assures the sufficiency of your income in comparison to your debt obligations. The lenders prefer borrowers to have their debt-to-income ratio at, or below, a certain level (usually around 40%), and if yours is higher than that, try paying down some of the debts that have the maximum impact in lowering your debt-to-income ratio.
- Undocumented income: The most important factor while assessing your application is your income and expenditure. Lenders look more favorably upon the incomes that are consistent, sustainable, and verifiable, rather than just their size. Make sure you have accurate records of your finances and documentations of all of your income (i.e., most recent W-2 statements, tax returns, bank statements, and paycheck stubs).
- Inadequate employment history: Before applying for a mortgage, it is essential that you have a consistent employment history. It is better if you have two years of consistent employment before applying for a loan. The reason is that a lender wants to know that you are able to hold down a job long enough to pay back the money you have borrowed.
- A small down payment: While there are many mortgage programs and lenders that require a smaller down payment (for example, an FHA loan requires only 3.5% down payment), providing a larger down payment can offset some of your other not-so-strong loan qualifications (such as higher debt-to-income ratio or weaker credit than preferred), if any. The lenders look at your down payment as your skin in the game, so bigger is always better when it comes to a down payment to strengthen your home mortgage loan application.
With a little patience and extra work at your end, you can find yourself in a position to get your mortgage application approved the next time.