After finding a great home that you’re willing to spend the big bucks on, it can be really disappointing and disheartening to be turned down for a mortgage.
But instead of throwing in the towel in defeat, it would be best to identify what’s contributing to your difficulty in getting approved for a mortgage. Understanding what the issues are can help you make the necessary changes so that the next time around, you can be in a much stronger position to get approved.
The following are some of the more common reasons why you might find yourself getting turned down for a home loan.
1. Your Credit Score Needs Improving
There are several important factors that lenders assess when they determine whether or not to approve a mortgage applicant, and credit score is one of the big ones. While each individual lender will have their own specific minimum credit score that they’ll accept, you can expect the minimum credit score required to get approved for a mortgage to be anywhere between 620 to 650.
A low credit score makes you a bigger perceived risk to lenders. One of the biggest culprits behind low credit scores is a history of missed payments. If you’ve missed a few debt payments in the past, you can bet that they’ll negatively impact your credit score. And the lower your score, the lower your chances of getting approved for a home loan.
If that’s the case for you, consider taking some time to improve your score before applying for a mortgage. Find out why your score has taken a hit and take measures to rectify it.
2. Your Down Payment Amount is Too Small
Your down payment goes towards the purchase price of the home, but if you aren’t able to come up with a decent amount relative to the property’s value, the odds of getting turned down for a mortgage are pretty high.
Down payment amounts are based on the purchase price of the home, and depending on what type of mortgage you’re applying for, there are minimum requirements. For a high-ratio conventional mortgage, for instance, the minimum amount is 5% of the purchase price, while for FHA home loans, the minimum amount is 3.5%. If you can’t come up with these minimum amounts, your lender will likely turn you down.
It should also be noted that all other factors that lenders look at will influence how much of a down payment you’ll need. If other parts of your financial life are a little shaky, your lender might require a bigger down payment.
3. Short Employment History
Having a steady job that pays well is incredibly important when applying for a mortgage, for obvious reasons. You could be making great money and have a full-time job with a reputable company, but if you just started a couple of months ago, that might not be enough employment history to make your lender comfortable enough to approve your mortgage application.
Generally speaking, lenders require at least two years of steady employment before they approve a loan application. That’s because they want to make sure that you’re capable of holding a job for the long haul and aren’t transient in your employment profile.
The ability to hold down a job consistently will assure lenders that you’ll have enough money coming in on a regular basis to make your mortgage payments on time and in full every month. But without such a history, lenders have little to go on.
4. Too Much Debt Relative to Income
Your income is an obvious factor that lenders will look at; after all, they want to make sure you bring in enough of an income to be able to comfortably pay your mortgage. But if you’ve got a huge debt load that’s offsetting your income, that could play a huge factor in whether or not your lender will approve your mortgage application.
More specifically, your debt-to-income (DTI) ratio will be factored into the equation. If your current debt load is already a bit much for you to carry, throwing a mortgage payment into the mix will probably overload you financially.
To weigh your debt against your income, lenders will divide your total monthly debt by your monthly income. If your debt is currently $2,000 per month, for instance, and your monthly income is $5,000, your DTI would be 40%.
A DTI that’s too high means your income is stressed by your current debt, making you more of a risk to default on your mortgage. Lenders like to see a DTI of no more than 43%, so if your DTI is higher than that, your lender will likely turn you down for a mortgage.
5. The Property Was Appraised Too Low
Lenders want to make sure that whatever buyers agreed to pay for the home is in line with current market values. They won’t want to hand out loan amounts that far exceed what homes are worth. That’s why they send out professional appraisers to verify the current value of the home being purchased. If the appraisal comes in too low, the mortgage could be denied.
If a buyer agrees to pay $600,000 for a home, for instance, but it’s actually worth $550,000, the lender may be hesitant to provide a loan for this transaction because the collateral they have to back up the loan isn’t worth as much as what the buyer agreed to pay for it.
Property values must be enough to back the amount of the home loan amount that the buyer is applying for. If it’s not enough, the mortgage could be rejected.
The Bottom Line
It’s not fun being turned down for a mortgage. But that doesn’t mean your dreams of homeownership are necessarily quashed. Find out why you’re having trouble getting approved, and take measures to make the necessary improvements so that the next time you apply, lenders will be more than willing to extend a home loan to you.