Find out how mortgage applications fall short and how you might be able to strengthen your application to ensure you’ll qualify.
Finding your perfect home is exciting, but the mortgage application process can be nerve-wracking, especially if you’re not sure you’ll qualify. Once you understand why mortgage seekers are rejected, you can begin to take steps to improve your application. Here are six reasons loans are denied, plus what you can do to improve the strength of your loan application.
1. Debt-to-income ratio is insufficient for the loan amount.
Whether you’re dealing with student loans, credit cards, past tax payments, or other liabilities, you may find that your lender considers your income insufficient to cover both a mortgage payment and your existing debts. To reapply, you’ll need to either:
- Pay down your debts significantly: If you have a flexible timeline or are otherwise able to pay down your debts, that is a great option to boost your application.
- Put more money down on the home: you may be able to obtain additional down payment funds or have a relative contribute to do so.
- Add a co-borrower or co-signer.
2. Career or other income changes
If you’ve recently switched careers, left a corporate job to start your own business, or had a significant downward adjustment to your income, you may not qualify for as much money as you originally hoped. This is one reason to get a pre-approval before you go too far down the road with your home search.
If you recently changed jobs within your field, this may be seen as a continuation of your previous work. If you left a salaried job to launch your own business, you should hold off on buying a home or refinancing. In some cases, if you are having trouble qualifying for traditional mortgage products, your loan officer may propose alternative documentation programs. You can learn more about them here.
3. You recently made a major purchase
Many people get excited about their new home and want to start buying modern furniture, backyard playsets, or a shiny new car to park in the driveway. Though a shopping spree might be tempting, it’s best to hold off until you’ve cinched the loan approval. After all, large purchases change your available cash on hand and thus your financial picture in the eyes of the lender—the unintended consequence could be a negative decision on your loan application.
With that in mind, feel free to build out your wish list as your application awaits underwriting review, but resist the temptation to splurge! You’ve got this—exercise that iron willpower.
4. Your accounts show an influx of money from unknown sources.
Generally speaking, applicants need to submit at least two months of bank statements. If these show significant cash deposits or bank transfers from unknown sources, the application may be delayed or denied. Per the US Patriot act, all funds used for the purchase of a property must be vetted -- you just need to be able to show a paper trail.
Some lucky borrowers receive down payment assistance from family members. In some instances, this is considered an acceptable income source. A disclosure of this type of gift could be as simple as a letter from your family member to the loan officer showing the funds transfer on their end and disclosing the source of the money.
5. You gave incomplete or conflicting information on your mortgage application.
If there’s anything in your application that could be seen as a red flag—whether variable income, gaps in employment history or any financial inconsistencies—you can bet on the lender noticing it. Thus, it’s crucial to disclose all pertinent financial information from the get-go and be prepared to explain the underlying circumstances. In addition, you’ll need to provide a lot of background in the form of tax returns, paycheck stubs, and other paperwork. Your lender normally lets you know what’s needed, but if you’re unable to verify the information on your application with corresponding paper submissions, you might find your application rejected.
Although you may feel a time crunch, take your time filling out information associated with your application. Check (and double-check!) your numbers to make sure that you provided accurate and honest responses to all of the prompts. If there is a discrepancy, work with your loan officer, banker, CPA, or other professional to correct it or provide any supporting documentation.
6. There are issues with the home
A rejection may not have been due to your own actions or profile, but due to the home itself. This can occur if the appraisal comes back significantly lower than the price you agreed to. It can also happen in cases wherein the home is considered poorly maintained or is too much of a fixer upper. For some loan programs, the home must meet minimum standards of habitability to qualify for a mortgage.
Simplist's technology searches through thousands of loan options to match you with the best mortgage for your unique history. We even pair you with a licensed loan expert to partner with you from before your application through your closing. They’re a great resource to ensure your application is solid for one of our loan programs. You can schedule a call today, and they’ll help ensure you're qualified for the best programs possible for you. We’ve seen it all, and we can point you in the right direction to get you on the path to approval.