There are a few reasons for home loan rejection. It’s not pleasant to think about. Particularly when you’re ready to enter the residential real estate market for the first time or repeat the process again. Regardless of your situation, you should know the do’s and don’ts of mortgage approval. Since this is such a large commitment, it’s best to be in-the-know. After all, you want to things to go as smoothly as possible. Plus, conditions are gradually changing. Those changes are in your favor.
During the housing and market crash of ten years ago, lenders lost a whopping $1 trillion in unpaid loans. Loose lending guidelines allowed too many risky loans. Following the worldwide downturn, lenders adopted must stricter standards. But now, a decade later, that’s changing. And, lenders are less stingy. That’s certainly good news for home loan borrowers. But, this doesn’t mean mortgage applications aren’t rejected. It still happens, just not as often as about five years or more ago.
Top Home Loan Preparation Steps
The key is to be fully prepared. Okay, so you probably know you need a down payment. And, you’ve probably heard 20 percent is the minimum. However, that’s not true. There are home loans which only require about 10 percent and some as little as 5 percent to 3 1/2 percent. You should definitely shop and compare rates and terms. A 30-year fixed conventional mortgage is what the majority of buyers go for. This way, you can always put more toward the principal balance to amortize the mortgage faster and build equity quicker.
“There are some kinds of properties many lenders remain skittish about financing. Among them: second homes and investment properties. This doesn’t mean funding isn’t available for these buildings; only that they carry more stringent terms, like bigger down payments and more cash reserve requirements.” —Daily Finance.com
Also, keep in mind a high credit score is great but often not totally necessary. You don’t need a credit score of 850 to qualify for a home loan. And, there are other factors for approval. These include, but are not limited to: employment history, type of employment, cash reserves, debts owed, and more.
Most Common Home Loan Rejection Reasons
Though a lackluster credit score is usually a reason for a mortgage rejection, this isn’t always the case. There are a few other home loan rejection reasons, like the following:
- Self-employment. Self-employed individuals face a difficult challenge. In order to reduce their income tax burden, they must legally use different tax strategies to stay out of a higher bracket when possible. But, doing this also reduces their net income. That presents a dilemma for lenders in some instances. Aside from income, there is also the matter of being self-employed and not employed with a long established company.
- Inconsistent information. Even mortgage applicants who are not self-employed might encounter a problem. For instance, the information you provide the lender and the information provided by your employer might reveal some discrepancies. At the very least, this will cause a delay until things are cleared up to move forward.
- Disparate home appraisal. Another reason for a home loan being turned down is a low or even high home appraisal. If the appraisal is low, the seller might back out. Or, you’ll simply have to borrow less and accept the home isn’t worth as much as you offered. If the appraisal comes in higher than the agreed sale price, you’ll have to come up with the difference. What’s more, the seller will likely take advantage and relist at a higher asking price.
- Too much debt. Of course, if your DTI or debt-to-income ratio is too high, you won’t be approved for a mortgage. However, this is usually revealed through the pre-approval process. Unless you take on more debt after being pre-approved.
If you’re going to sell your home in the near future and buy a new house, please don’t hesitate to phone me at 407-616-7286, I’ll be happy to speak with you.