Home loan rejection. Three words no one ever wants to hear. It’s more than disheartening. It’s downright confusing and angering. But, this very scenario does happen. Usually, it’s the result of one or more factors. Most often, it’s due to something about the borrower. For example, did you know that a car loan can cost you a mortgage approval? Or, just by making a cash withdrawal at the wrong time. A home loan rejection can also be caused by a bad DTI or debt-to-income ratio. It could also come as the result of your job. For instance, if you’ve been employed at the same company for the past five years or more, this is sufficient. But, if you’ve changed jobs or worse yet, gone from one career field to another, this will probably present a problem.
Difference between Mortgage Pre-Qualification and Pre-Approval
More often than not, a mortgage approval goes south because of something the borrower does (or doesn’t do). However, this isn’t always the case. But, it is very important to understand the basics. For instance, the difference between a mortgage pre-qualification and a mortgage approval. While these sound similar, they are quite different. Yes, both are part of the home buying process. Said process begins with a home loan pre-qualification. This is the first step as it is a cursory look at your finances.
“It is easy to assume that once you have pre-approval, all you have to do is find a home to buy, sign some papers, get your money and purchase your home. But occasionally, buyers are given a nasty surprise when they go to get the mortgage. Even though they were pre-approved, the lender declines to give them the loan.” —Credit Sesame.com
The next step is a mortgage pre-approval. This is a more in-depth examination of your finances, credit history, employment, assets, and so on. When you’re given a home loan pre-approval, the lender gives you the amount you are able to borrow. At this point, you can your house hunt in earnest.
Top Home Loan Rejection Reasons
When most people receive a mortgage pre-approval, they think they’ve reached the final stage. But, this just isn’t true. There’s a ways to go yet and even after a seller accepts a buyer’s purchase offer, there is still more to come. For example, the inspections and appraisal. (Not to mention the last minute “soft credit check” by the lender.) Here are the top reasons for a home loan rejection:
- Poor credit score. It is important to understand your credit score is among the single biggest factors in obtaining a mortgage. Usually, people with scores of 620 and above are able to qualify for a home loan. However, this doesn’t mean a good to high score will guarantee you are approved for a mortgage.
- Insufficient income. This is a tricky one because it deals not just with your gross income but your monthly obligations. In fact, this is where your DTI or debt-to-income ratio comes into play. Even if you earn a good living, if you have too many debt obligations, that’s a significant problem.
- Small down payment. There’s a common misconception that a 20 percent down payment is standard. However, this is somewhat misleading. Some mortgage products only require a down payment of 3.5 to 5 percent. Although, the down payment amount is critical to your final approval.
- Appraisal comes in low. Approximately 1 in 10 home purchase transactions fail to go through. One reason for this is a low appraisal. You and the seller agree to a price but the appraisal assesses the property at a lower value. The bank won’t loan you more. Instead, you’ll have to come up with the difference or renegotiate with the seller.
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.