When you are trying to buy a house, getting approved for a mortgage may be the last thing on your mind. But it’s important to remember that you may not get approved for a mortgage if you do not have the down payment, meet the income requirements, or meet the credit requirements.
If you’ve been seeking a mortgage, you’re not alone. There’s a lot to think about and consider, and it can be confusing. But where do you go to find the answers? There’s an abundance of advice on the internet, but many of the more popular blogs and websites can be hard to find.
Many people have had the experience of applying for a loan, only to find they were denied a mortgage because of an adverse credit history. This happens to people who have had credit problems in the past. Loans are based on the information on your credit report, and lenders use this information to decide if you are a good candidate for a mortgage. You were denied a mortgage because of your credit history and this is unfortunate. If you want to know what can be done to restore your credit rating to where it was, then you should read on.
Waiting to hear whether you’ve been accepted for a mortgage can be a stressful experience. You’ve probably just spent months searching for the ideal home, debating every detail with your spouse, and then disclosing practically all of your personal financial information to the lender.
… Then you get the terrible news: “We hate to inform you that your application has been denied.”
What! How? Why?
When my friend Greg and his wife initially tried to buy a house, this happened to them. They had spent a significant amount of time with their realtor and believed they had discovered the ideal home in the ideal location. Then, when the lender turned down their application, their life was turned completely upside down.
This isn’t an uncommon occurrence. The refusal rate for conventional single-family loans in 2019 was 18.8%, according to statistics from the Home Mortgage Disclosure Act (excluding withdrawn and incomplete applications). That means that roughly one out of every five people you know who applied for a loan were denied for one reason or another.
It can feel like everything is gone when this happens to you. But there’s some good news: you don’t have to give up all hope. There are numerous options for overcoming this stumbling block. And in this post, we’ll go through some of the alternative options for getting the mortgage you need and eventually becoming a homeowner.
Why Is It Possible That Your Application Was Rejected?
The first thing you’ll need to do is discover out why your mortgage application was turned down. This is crucial since it will dictate what you do next to correct the situation.
There could be a variety of reasons why you were turned down for a loan. The Consumer Financial Protection Bureau (CFPB) has released a list of the most common refusal grounds, as well as the percentage of persons who were denied for each reason (as of 2019):
- 37.2 percent debt-to-income ratio
- 34.8 percent have a poor credit history.
- 19.7% of the time, there is insufficient collateral.
- 12.9 percent of the total
- 8.9% of credit applications are incomplete.
- 6.7 percent of the data is unverifiable.
- 1.8 percent of the population has worked in the past.
Let’s take a closer look at each of these causes in the parts that follow, as well as some alternatives for how to remedy the situation.
If you have a high debt-to-income ratio,
Before handing you hundreds of thousands of dollars and agreeing to let you pay them back over the following 30 years, a lender will want to know if you’re capable of repaying them.
To figure this out, they’ll need to look at your income and see how it compares to your expected mortgage payment as well as your other bills.
Lenders often mention your debt-to-income (DTI) ratio at this point. The 28/36 rule is frequently used to determine this. The 28/36 rule is a straightforward way to assess your financial condition by examining two key factors:
- The front-end ratio: You should spend no more than 28% of your monthly gross income on mortgage expenses such principal, interest, property taxes, homeowner’s insurance, and so on.
- The back-end ratio: You should spend no more than 36% of your monthly gross revenue on recurrent debt payments (including your anticipated mortgage expenses).
This is where my friend Greg got himself into trouble. His yearly salary was around $60,000 at the time of the application, therefore his monthly gross income before taxes and retirement contributions was $5,000.
Meanwhile, Greg and his wife were paying $1,000 per month for two cars, student loans, and a few outstanding credit card bills.
Because the house he was asking for would cost roughly $1,500 per month, his total monthly debt was expected to be $2,500, resulting in a debt-to-income ratio of $2,500/$5,000 = 50%. That, however, was not an option for the bank.
Lenders are sometimes ready to disregard the 28/36 guideline. They may go all the way up to a debt-to-income ratio of 43 percent in some situations. If you borrow more than this, studies have shown that you’re more likely to have trouble completing your payments, especially as time goes on.
What Can You Do?
When it comes to having an excessively high DTI, there are various aspects that you may control.
The first and most obvious response is to find a means to make more money!
“Oh, yeah, right… why didn’t I think of that!” you might sarcastically exclaim. However, there are a few different approaches you might use (even if it just increases your income on paper).
- Applying for a loan with your spouse is an easy method to do this. This is especially beneficial if your husband works, as two incomes are preferable to one. Just keep in mind that if your spouse has a bad credit history, it could slow down the process.
- Another suggestion is to have a co-signer, such as a parent. They will most likely be further along in their jobs and will be able to significantly enhance their earnings. However, keep in mind that if your parents’ names are on the mortgage, they will be legally accountable for the payments just as much as you. Make sure you make your payments on time so you don’t put them in financial problems and ruin your relationship with them.
- A long-term answer would be to return to home ownership once you’ve found a new career. Many of my friends have shifted careers and earned 25% more than they were earning with their previous workplace. Take mindful, however, that recent work changes may have a negative impact on your application. As a result, you’ll need to allow this choice plenty of time to sort out. (There will be more on this later.)
There are two areas you may work on when it comes to the “debt” side of the issue. The first step is to cut down on your recurrent debts. Any credit card debt, school loans, vehicle loans, or other loans you may have are examples of this.
There are two very effective debt-reduction strategies:
- The debt snowball strategy is arranging your bills in order of smallest to greatest balance, then focusing on paying off the smaller balances first. As each one is paid off, you can roll it over to the next one, increasing the payment with each one (like a snowball).
- The debt avalanche approach is arranging your bills in order of greatest to lowest interest rate, then focusing on paying off the highest interest obligations first. As each one is paid off, you can roll it over to the next one, increasing the payment with each one (like an avalanche).
Another alternative is to lower your total expected mortgage payment. One approach to achieve this is to increase your down payment and so reduce the amount you’re borrowing.
Most lenders expect you to contribute at least 20% of the purchase price at closing. Some conventional mortgages, on the other hand, will allow you to submit less if you agree to pay PMI (principal mortgage insurance). FHA (Federal Housing Administration) loans allow for a 3.5 percent down payment.
While all of these exclusions are helpful in getting your mortgage approved, the truth remains that the smaller your down payment, the higher your monthly mortgage payment will be. This is why you should investigate all available options in order to increase your down payment as much as feasible.
One option is to borrow the funds you require from your retirement savings. Here are some of the alternatives on the table:
- Withdrawal from a traditional IRA. To use as a down payment, first-time homebuyers can withdraw up to $10,000 from their IRAs penalty-free. If both you and your spouse utilize it, the sum can be increased to $20,000. You would still owe taxes on these withdrawals even if you didn’t have to pay the money back.
- Take a loan from your 401(k). You have the option of taking out a $50,000 loan or 50% of your vested account amount (whichever is less). The money must then be repaid within five years at a reasonable interest rate. To see if loans are permissible, check with your HR department or plan administrator.
- Contributions to a Roth IRA Because Roth IRA contributions are taxed in the year they are made, you can take them out whenever you like. You’ll only want to avoid taking any money out because it will result in penalties and taxes.
Another thing to think about is your homeowner’s insurance. Because this will be factored into the monthly payment, it’s worthwhile to look around for the best deal.
The final (and maybe most difficult) choice is to reevaluate the house you’ve chosen and hunt for more economical alternatives. This could mean looking for one with a cheaper asking price, or it could mean looking in a neighborhood with lower property taxes.
In any case, everything you can do to reduce your monthly mortgage payment will help you fulfill the DTI standards.
If you have a poor credit history,
Your credit score is a number that sticks with you for the rest of your adult life. Your credit score, just like your grades and GPA used to determine whether or not you were eligible for credit cards, loans, cell phones, utilities, certain employment opportunities, and… of course… mortgages, determines whether or not you will be eligible for so many things that adults require, such as credit cards, loans, cell phones, utilities, certain employment opportunities, and… of course… mortgages!
In the United States, the average FICO score is 711. While this is encouraging news, given that a traditional 30-year mortgage requires a minimum FICO score of 620, there are a few limitations.
For starters, even if your mortgage is approved, you will not be offered the greatest interest rates. People with FICO scores of 760 or better are usually eligible for this. Even if your APR is 0.5 percent higher than the industry average, every $100,000 borrowed could cost you $25 or more per month.
Second, with a FICO score of 711, you’re just one step away from being turned down for a mortgage. One – just one – recent late payment, according to FICO’s credit harm data, might cause your FICO score to decrease by as much as 180 points!
Given that your current rating is most likely the consequence of years of on-time payments, that’s a rather strong reaction.
Then there are some unfortunate people who already have FICO ratings under 620. Perhaps they hit some roadblocks or ran into some financial difficulties. Is it now certain that they will never enjoy the benefits of homeownership?
Certainly not! Here’s how you can retaliate.
What Can You Do?
Understanding how your credit score is determined is the greatest approach to increase it. FICO makes no apologies for disclosing which factors will influence your score. On their website, you can obtain a detailed breakdown.
In a nutshell, your FICO score is determined by the following data from your credit reports:
- 35 percent payment history
- 30 percent of the total amount owing
- 15 percent of people have a long credit history.
- 10% for a new credit
- 10 percent credit mix
The good news is that each of these categories can be influenced and even manipulated in a variety of ways. Here are a few pointers to help you get started in the correct direction.
- Make sure you pay your payments on schedule. This one may seem self-evident, but it’s worth mentioning because it accounts for 35% of your total score. I’ve always found that the most foolproof technique to ensure I never miss a payment is to set up automatic payments with each new credit card on the first day.
- Keep an eye on your credit utilization rate. Lenders will consider you a risky candidate if the amount you owe each cycle surpasses 30% of your authorized credit limit. To fully boost your score, strive to keep your balances around 20%. (or even 10 percent if you can help it).
- Pay off revolving debt. If you have revolving credit card balances, keep in mind that they will be included in your credit utilization ratio computation. Use the debt snowball or debt avalanche tactics I discussed above to get rid of these as rapidly as feasible.
- Maintain the status quo with your current cards. When you close a credit card, it has two effects on your credit score. Your total available credit reduces first, then your credit usage ratio rises. Second, it shortens your credit history’s age. This is why, if there is no yearly fee, it is preferable to keep your cards open and simply store them in a drawer.
- Please don’t use it for anything else. A hard inquiry is created every time someone pulls your credit history, which might reduce your credit score. Limit the number of hard inquiries before applying for something as important as a mortgage so that your score is as high as feasible.
You may need to take further procedures if your FICO score is especially low. You may, for instance, apply for an FHA loan, which accepts applicants with credit scores as low as 500. Keep in mind, however, that you would be deemed a high-risk borrower by the lender, and hence your interest rate would be higher than a typical, conventional loan.
Another option is to employ the co-signing approach once more with a parent or family member. When you co-sign a loan with someone who has a good credit score, your chances of getting the loan authorized increase.
However, it’s worth noting that this person would be taking a significant risk because they’d be just as responsible for the loan as you. So don’t disappoint them!
If Your Collateral Isn’t Enough
Assume your credit is excellent, your payments are low, and everything appears to be in order. The estimate for the home you’re buying may be cheaper than the asking price, which can throw a knot in the process. This is referred to as insufficient collateral.
Keep in mind that the home you’ll be living in will be considered collateral when you apply for a mortgage. It’s the amount you agree to give up if you can’t make your mortgage payments for whatever reason.
The bank wants to be able to sell the house for at least the amount they agreed to loan you when you applied for the mortgage. As a result, if the worth turns out to be less than the asking price, they won’t be able to recuperate their losses, and they won’t be able to approve the mortgage.
This is exactly what occurred to me with our current residence. We had agreed on a $290,000 asking price. However, when the mortgage lender calculated the worth, they came up with $270,000. (Forget about the fact that the comps they used to arrive at that amount made no sense!)
Despite my best efforts, the mortgage firm refused to budge and only offered to approve the loan for $270,000. That meant we’d have to find another way to come up with the extra $20,000, on top of the 20% down payment we’d already agreed to bring to the table!
This happens a lot more frequently than you may believe. Asking prices will increase in relation to their natural property values, especially when it’s a sellers’ market and houses are being snapped up left and right. This will be a problem unless you have the funds to cover the gap between the buying price and the mortgage lender’s offer.
Here are some possible next measures to take if you find yourself in this predicament.
What Can You Do?
When you don’t have enough collateral, the simplest method to keep moving forward with your mortgage application is to pay the difference. However, saying something is much easier than doing it.
We had to take out a separate loan to come up with the additional $20,000, as we did in my situation. Fortunately, we were able to find a low-cost choice with a low interest rate.
You might use your retirement accounts in the same way that you used them to help with your down payment. Borrowing from your 401k or withdrawing contributions from your Roth IRAs are also viable possibilities.
One last weapon you have is to pay for a new property appraisal. Perhaps a different appraiser will come up with better comparables and come up with a value that is greater than the first estimate.
Keep in mind that a house appraisal can set you back up to $500. Furthermore, there are no guarantees that the value will be higher than the figure provided by the original estimate.
If the Lender’s Requirements are Excessively Stringent
It’s tempting to assume that all mortgage lenders are the same because they all seem to advertise the same “excellent low rates” and “lowest closing expenses.” However, the truth is that they aren’t.
True, in order for a bank to have a mortgage guaranteed by a government sponsored organization such as Freddie Mac or Fannie Mae, it must meet a set of minimal conditions. Beyond that, each lender is free to determine their own criteria for providing a mortgage.
As a result, certain lenders may impose stricter conditions on applications and only engage with applicants who:
- Have debt-to-income ratios that are lower than the 28/36 rule suggests
- Have a credit score that is higher than the national average
- Bring at least 20% of the purchase price as a down payment.
- Require financing of at least a certain amount (for example, $100,000 or more).
The only thing it can’t do is break pre-existing rules like anti-discrimination statutes, which make it illegal to reject candidates based on their age, ethnicity, sex, religion, or other factors.
If you discover that you don’t meet one of these lender-specific standards, you have a few options.
What Can You Do?
The good news is that mortgage lenders come in a variety of shapes and sizes. The Consumer Financial Protection Bureau reported that 5,508 financial institutions issued an anticipated 9.3 million mortgage originations in 2020. Banks, savings associations, credit unions, and non-depository mortgage lenders are all included.
In a nutshell, you have a lot of choices. Continue shopping around if one lender rejects you because your credit score is too low, but you know it passes the Federal criteria.
Call a few mortgage providers and inquire about the particular criteria that led to your rejection. Other organizations may have similar restrictions, but they may also be prepared to provide you with better alternatives or loan solutions that are more suitable for your financial circumstances.
If you do discover someone else ready to deal with you, you could use that to your advantage with your existing lender.
Tell them you’ve got another offer and that they’re going to lose a customer if some sort of deal can’t be worked out. They might be able to work things out because most mortgage officers are like car salesman, trying to close as many deals as possible.
If You’ve Recently Changed Jobs
We change employment for a variety of reasons. Like most individuals, I’ve moved from one employment to the next in search of greater professional possibilities and more pay.
However, there are a variety of other reasons for you to look for a new job. Perhaps you’ve:
- I looked for a different type of employment with a different company in the same industry.
- Accepted a job where the pay is based on commission rather than salary (such as being in sales)
- I’ve transitioned from a full-time employee to a contractor.
- For personal or family reasons, you’ve moved to a new city.
- Industries have been drastically transformed (such as going from being an engineer to the medical field)
- Start your own business or work as a full-time freelancer.
While all of these actions are great and can undoubtedly lead to increased profits over time, they are sadly deemed too hazardous by mortgage lenders. Changes in employment can be regarded by lenders as indications of instability. And insecurity isn’t conducive to loan repayment.
Whether or whether this is accurate, it doesn’t seem to make a difference. If this is how the mortgage market perceives employment changes, it’ll be a requirement we’ll have to deal with, just like the things that influence your credit score.
Lenders prefer individuals who have worked in the same position for at least two years. If that’s what’s holding up your mortgage application, there are a few things you can do to get things moving again.
What Can You Do?
The first step is to apply for a loan with someone who has been employed for at least two years. If your spouse, for example, met this condition, you might add them. If you and your spouse haven’t worked in more than two years, you may need to enlist the assistance of a family member.
Some mortgage providers are more cognizant of work patterns than others. If you can establish that you’ve worked in the same industry for numerous years, they might be more tolerant on this criteria.
Another option is to try to time your actions strategically. If you’re thinking about changing jobs, wait until after the mortgage has closed before making any decisions. You’ll be free to go wherever you choose once the mortgage is completed.
If You’ve Made an Unexplained Deposit Recently
What are some additional problems you could encounter when applying for a mortgage? Large deposits into your bank accounts, believe it or not, can cause the procedure to halt. These could come in the form of a cheque, wire transfer, or even cash.
What makes you think that would be a problem? It’s because the lender might believe the money doesn’t belong to you. It could be a short-term loan to inflate your finances and make them appear more stable than they really are.
They want to make sure they’re not working with someone who generates money “off the books” in more extreme cases (such as a drug dealer or other illegal activity).
Another fear is that if you have a significant deposit, someone will most likely want it back at some point. That is to say, it could be perceived as a new financial commitment that would eventually put your capacity to make monthly payments in jeopardy.
Anything that isn’t typical of your routine transactions is considered a “large” deposit. For example, if you earn $40,000 per year and get $1,500 every two weeks, a $10,000 transfer out of the blue will appear suspicious.
What Can You Do?
A big deposit isn’t always a deal breaker in most “regular” situations. You just must be forthright and truthful about where the money came from and why it was deposited in the first place.
You may demonstrate the mortgage firm, for example, if you have a side hustle that pays well. If you have any official payment records, send them along to show that this is additional earned income on top of your normal job.
Perhaps your parents gave you the substantial deposit as a present to assist you pay for the down payment. If this is the case (or a similar arrangement), it may be beneficial to request a letter from your sponsor in addition to the deposit.
This might be as simple as an email indicating that the funds were given as a gift and do not need to be repaid.
Final Thoughts
Credit applications are declined for a variety of reasons. A high debt-to-income ratio, a poor credit history, insufficient collateral, or a recent job change are some of the most typical explanations.
It’s not the end of the world if something happens. There are a number of methods that you and the lender can work through the problem and reach an agreement. The goal is to determine the precise reason and then focus on actions that will benefit the cause.
If your debt-to-income ratio is a problem, for example, you could consider increasing your income (by co-signing with a spouse or parent) or reducing your debt.
If you have a snag in your credit history, you might want to apply for an FHA loan or take a long-term approach to improving your credit score.
If you don’t have enough collateral, you can get around it by taking out a loan from your retirement assets or getting another estimate.
The good news is that there are thousands of mortgage lenders to choose from, some of which have more relaxed standards than others. It won’t be long before you get accepted for your loan and become a homeowner if you stay persistent and strive towards overcoming the hurdle that stands in your way.
Continue reading:
- Pre-Approved Mortgage Loans for First-Time Homebuyers
- Before you get a mortgage, here are eight things you should know.
- When obtaining a mortgage, all new home buyers should be aware of the following mistakes.
So You Weren’t Approved for a Mortgage, Now What? appeared first on So You Weren’t Approved for a Mortgage, Now What? The post Minority Mindset appeared first on Minority Mindset.
In today’s real estate market, buyers and sellers have many options when it comes to financing a home purchase. First, you can take out a home loan, which is a loan made to you by a bank or other financial institution in which you agree to pay the bank back over time with interest. Second, you can purchase a mortgage insurance policy, a type of insurance policy that covers you in the event of a default on your loan. Third, you can refinance your home mortgage, which means you’ll own your home outright, but you’ll pay back your home loan with the same lender. Fourth, you can get a home equity loan, which are loans that are secured on the equity in your home. Finally. Read more about chances of getting denied after pre-approval mortgage and let us know what you think.
Frequently Asked Questions
What happens if mortgage application gets rejected?
If your mortgage application gets rejected, you will have to wait for a new one.
Why would I not get approved for a mortgage?
You may not be approved for a mortgage if you have too much debt, or if your credit score is low.
Can you be pre-approved for a mortgage and be denied?
Yes, it is possible to be denied a mortgage.
Related Tags
This article broadly covered the following related topics:
- mortgage loan denied last minute
- getting denied a mortgage after pre approval
- what happens if mortgage application gets rejected
- fha loan denied now what
- can a mortgage be denied after closing
