Top Reasons Why You Can Be Turned Down For A Mortgage Loan
Using a mortgage to finance your new home is a welcome development. Once your application has been submitted for review, it can either be accepted or denied. Your loan could be denied for a variety of reasons, and it is a normal occurrence when there is a problem with your application. Do not despair if your mortgage application has been rejected as there is still hope for you owning your home. The best way to solve any problem is to first understand the root cause of this problem.
In this guide, we are going to discuss some of the top reasons why your mortgage loan application was denied. As much as 10% of all loan applications were denied in 2019 due to various issues. If you are here because your application was denied, then you are in luck because we will examine in depth the most common reason for loan applications. Mortgage lenders and banks have strict underwriting standards to reduce the risk of default, and you must ensure that you meet these standards when you resubmit your application.
Bad/ Poor Credit
Your credit score or credit history is quite important when you are applying for a mortgage loan. When discussing credit scores, there are two very vital factors:
● Your credit history- This contains your entire financial records including debts, loans, credit cards etc.
● Your credit score where the higher the number the better your credit.
In the case of credit history, having insufficient data can lead to your application being rejected. This happens because lenders what to see a strong history of repayments on loans taken out in the past and when this track record is absent, it becomes almost impossible for you to take out a mortgage. Also, if your credit history reveals any unpaid loans, bankruptcy, or any other event that makes you feel like a risk then the lender is sure to decline as these events affect your credit score overall. If your credit score is not above a mark set by the lender, your application will be rejected.
This is the most common reason why applications are rejected by banks and lenders, although there are ways you can prevent this from happening on your next application. First off, you need to ensure that there is sufficient information available on your credit history so that your lender can have a better view of your past credit dealings. If you have any unsettled debts in your credit statement, you should settle all accounts in collection, as this will improve your credit rating.
Property Issues
Another reason why your mortgage application could be rejected is because there is a problem with the property you want to acquire. If the lender feels like the appraisal was not done properly or the value derived from the appraisal is not sufficient to match the mortgage. In this case, this rejection has nothing to do with you and is about the property you want to purchase. Also, if a lender doesn’t feel like the state of a property is up to pay, they may decline your mortgage application because of a lack of confidence in the property you wish to purchase.
If you meet all the requirements for requesting a mortgage from your lender, then you should talk to your lender about the property and see if you can come to agreement on a new one. You should also ask if the lender has any preferred benchmarks that must be met by properties, so you can find a property that meets these benchmarks. This will increase the chances of your property getting accepted by the lender.
Debt Servicing
Your debt to income ratio determines how much debt you can take on. Simply put, your debt to income ratio is the sum of all your owed debts (plus the mortgage loan you want to take out) divided by your income. After calculations are made, if your debt to income ratio is too high, then the lender will view you as a risk and deny you access to a mortgage. If you have recently taken on any new debt or have any heavy past debt obligations that you are paying off, it may be in your best interest to clear those first before applying for a mortgage. This would ensure that your debt to income ratio stays small, therefore improving your chances of getting your mortgage application accepted. A rule you should follow is that your mortgage should not be more than 28% of your MGI (monthly gross income) while your total debt to income ratio shouldn’t be more than 36%.
Side note
It is important to note that FHA loans allow for higher percentages and are easier loans to get, therefore you can apply for those if you have higher DTI (Debt to Income) percentages.
Unverifiable Funds
Lenders are required by law to follow strict Anti Money Laundering (AML) protocols. These laws mandate that they have a credible idea of where the source of your down payment comes from. Each client of the lender is subjected to these background checks to ensure that all the money used for deposits are from legitimate sources. If the source of your down payment does not have a direct paper trail, for example, a gift from a relative or other sources without a trail, your mortgage application will be denied. It is important that you provide all possible documents that will help your lender to identify the source of your funds before you apply for a mortgage. This will prevent AML laws from getting between you and your dream home.
Limited Down Payment
Once you have submitted all your financial documents to your lender, they will review it and give you an estimate of how much you would need to put down and the amount that would be needed to close the deal. It should be noted that these funds are not included in your loan financing, and you would need to come up with the money separately. If you cannot come up with this money on your own, it is highly likely your request will be denied. Not being able to come up with the required amount as a down payment can be a big hindrance to your application, especially if you meet all the other requirements.
Coming up with money can be a big hassle, but one way you can overcome this hurdle is by taking an interest free loan or a gift from a relative, with the relevant paper trail to show the source of the funds. Ensure the appropriate paper trail is available so that you can scale through Anti Money Laundering (AML) checks by the lender. Another way you can avoid this problem is by ensuring that the seller pays some part of the closing costs to reduce the burden on yourself.
Conclusion
In this guide, we have examined some of the reasons why your mortgage loan application was denied. If you feel any of these reasons may have applied to you, it is best that you visit a financial professional to help you improve your application. Always remember to boost your credit score by paying any debts you may have in collections.
Sources-Become Debt Free
