Leading Reasons Your Mortgage Application Was Denied

Getting approved for a mortgage became hard for many Americans after the financial crisis of 2008 happened. Some very well-qualified home buyers were even turned down for mortgages However, ten years later many lenders have relaxed their lending standards. To this day, millions of Americans get denied when applying for a home mortgage loan.

Greenway put together a list of reasons why your mortgage application can be denied:

Reason #1: Debt-to-Income Ratio (DTI)

A lender can tell if you’re able to afford a mortgage payment by looking at your income to debt ratio. Many people think they may earn enough to pay their monthly bills and a mortgage, but If they are not able to sufficiently document monthly income then chances are getting denied for a home loan is possible. So, what does the DTI Ratio Measure? It measures monthly payments as a percentage of your gross monthly income.

Many lenders want a DTI of 45% or less. (Fannie Mae has recently increased (for some borrowers) the max DTI to 50%). However, there are many ways to reduce the DTI. For instance, consider a smaller mortgage (this means buying a smaller home or waiting longer to save to a bigger down payment).

Reason #2: Credit History

As part of a mortgage application, lenders will review your credit history and your credit score. 

The credit scores used for most mortgages may surprise you: typically, banks use older versions of the FICO score. Free credit score sites do not actually provide you with the specific version used by Fannie Mae and Freddie Mac. Most free credit score sites provide you with your VantageScore, which is an excellent estimate of the FICO used in mortgages.  

Many lenders will also want to ensure that you have enough credit history. Your credit history is a great way for a lender to tell whether you’re a risky investment or not. Lenders look not only at your minimum credit score, but also at whether you have any derogatory remarks on your credit report (foreclosure or bankruptcy). Once you understand your credit score and if it's low it is easier to correct.  

Reason #3: Collateral

You may be willing and open to pay a certain price for your new home, but if the bank doesn’t think the home is worth the value then you will not be able to receive a loan. Mortgage lenders typically will hire an appraisal company to perform an independent appraisal. The appraiser will examine the interior of the property and recent comparable sales.

Last, it is important to keep in mind a consistent employment history when applying for a home mortgage loan. In fact, many lenders require 2 years of consistent employment. Why? Because they want to know you’re able to hold down a job long enough to pay back the money they’ve loaned you. Having proof of employment such as pay stubs or tax information is important!

If you’ve been denied for a home mortgage loan, chances are it was because of one these reasons. Understanding why you were declined for a home loan can be a valuable learning experience. The good news? Just because you may have been denied a loan once, does not mean you will be denied again. With a little patience and work on your end, you can put yourself in a position to get approved the next time you apply. It is important to continue to improve your credit, even after you secure a loan. In the end, you may be able to refinance for a lower interest rate!