Having a home loan application rejected is a disappointing situation, but it’s not the final answer. That’s because the lending industry is a highly competitive one and because their are so many institutions trying to expand their books of business, it’s not unusual for an applicant or co-applicants to be turned-down by one mortgage company only to be approved by another.
Sometime, a denial comes for logical reasons, while other times, a rejection might seem unfair. An important thing to keep in mind is that during the housing crash, lenders lost more than $1 trillion in unpaid loans, are now dealing with more restrictive guidelines, but are rebuilding their customer base. That’s a good bit of news, but it helps to understand that good credit isn’t everything.
Mortgage Approval, Credit Score, and Cash Reserves
Okay, so you and your partner have been together for some time and both of you have been diligent about paying your bills on time, especially credit cards, car loans, and student loans. What might surprise you is that is only one factor in many that determine a lender’s decision to approve a home loan application.
“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
Mortgage lenders do put quite a bit of emphasis on a high credit score, but also your income, your employment history, and your cash reserves. Some applicants are set to go the closing table only to find at the last minute their home loan is being held-up because the applicants made the mistake of emptying their bank accounts. Lenders check your credit, your employment history, your income, and the cash you have on-hand for closing costs. In addition, home loan entities gauge your ability to repay by your DTI or debt-to-income ratio, the difference between your gross monthly income and your monthly obligations.
Common Reasons Home Loans are Rejected
There are many reasons for a home loan to be rejected and not just because of a mediocre or low credit score. If this is the reason given, you should immediately order your credit reports from all three credit reporting bureaus, which can be done for free once a year, at AnnualCreditReport.com. The best thing to do from there is to pay down your balances and payoff bad and/or old debts. If you find any inaccuracies, don’t use the online dispute system, mail letters, along with proof and don’t give up.
Though a poor credit file can be a reason for denial, there a other factors which cause a home loan rejection:
- You and/or your co-applicant is self employed. Self employed applicants face the dilemma of keeping their income low to lower their tax burden, but that is the very information lenders use, so a mortgage company will see a smaller income. In addition, self employed applicants present a higher risk precisely because they are not employed by an established company.
- Your information is inconsistent. In some instances, the information you provide might not be at parity with the information provided by your employer. That will cause a hold-up in the application until clarification can be made.
- Your home appraisal came-in too low. Though your purchase offer was accepted by the seller, the mortgage lender will rely on a home appraisal to approve a home loan. Should the appraisal come in lower than the purchase offer, you’ll either have to borrow less, request another appraisal, or find a different property.
- Your debt level is too high. If it’s determined that you have too much debt, you’ll have to pay down said debt in order to qualify. Ask the lender which are hurting your application most and focus on those.
Another reason for a home loan application to be denied is because of what’s known as potential debt. That means you have enough open credit that you could run-up and that would directly impact your debt-to-income.