Are you a wannabe homeowner faced with the disappointment of having a new mortgage denied? This may be crushing, especially when you have your heart set on one special home.
However, you aren't alone. About 14.5 percent of borrowers looking for a home purchase loan were denied in 2013, the most recent year for which statistics are available, according to an article published in the Wall Street Journal in early 2015. So take heart. Learning a few of the common reasons mortgages don't get approved may improve your chances of getting approved the next time.
Negative Info On Your Credit Report
One reason for a mortgage getting declined is if your credit report includes negative details. Your lender may choose not to take the risk of lending you money, despite the fact that the loan would be secured by a mortgage on a house. If your mortgage gets denied because of negative details found on your credit report, the lender must let you know this, as well as give you the contact information for the credit agency that provided the report. You then have up to 60 days to request your free report so you can verify (and if possible, fix) the issues on your credit report. This information may include a poor credit score, bankruptcy, an unsatisfactory payment history, or records of delinquencies and accounts sent to collection agencies.
High Debt, Low Income
Another situation that may result in having your mortgage denied occurs when a debt-to-income ratio is too high. This ratio represents how much of your household income goes to supporting debt. Two ratios come into play. First, your housing expense should be no more than 28 percent of your gross monthly income. Second, the total of all of your debts, including your housing expense, credit card, credit line and loan payments shouldn't exceed 36 percent of your income in most cases.
Insufficient Income Verification
Lenders like to know that borrowers have steady income so they'll be able to make the payments on a home loan. In most cases, the income verification criteria for mortgage approval includes a pay stub from within the past 30 days, W-2 forms for the past two years, and also the last two years of your federal tax returns.
A mortgage may be denied if any of these documents are missing. It's also important to note that self-employed borrowers may have additional income verification reporting.
Low Property Value
Sometimes the reason a mortgage application gets declined doesn't have anything to do with the borrower. Your credit record, income and debt ratios, and employment or work history are just fine, but the property isn't. Lenders request property appraisals to ensure the real estate in question is habitable, and worth enough money so they can sell the property to recover the money they've lent should the borrower be unable to repay the loan. Yet sometimes a property appraisal is so low it results in a mortgage denied to the borrower.
Receiving notice that your mortgage wasn't approved is never fun, but understanding the reasons why can help you be better prepared to present a stronger application the next time you're looking for a new mortgage. And when you're ready, remember that each lender is different, so be sure to compare mortgage offers for free online.