Rejection isn’t fun under any circumstances, but it can be especially frustrating when you’re trying to buy a home. If your mortgage application was denied, know that you aren’t alone. Nearly 11% of mortgage applications were denied in 2017, according to the latest available data from the Consumer Financial Protection Bureau (CFPB).
Reasons for a mortgage application denial usually fall into a handful of categories, including credit history, employment history or property issues. Regardless of what the problem is, you’ll walk away from the experience learning why you’ve been denied and can use that information to work toward a favorable outcome in the future.
Below are seven of the most common reasons your mortgage application might not be approved, according to the CFPB — and then how to move forward.
1. You have a history of late payments
Before you can be approved for a mortgage, your lender needs to make sure you’d be able to repay the loan. Your income and how well you manage your existing debt help determine whether you’ll satisfy your mortgage payments every month, but so will your payment history. Failing to pay your electric, internet or other recurring bills on time will eventually affect your credit reports and scores.
Why this matters
Your payment history makes up the largest chunk of your credit score — 35% — and is listed on every debt-related account included on your credit report. Your credit score factors in the following details about late or missed payments, according to the FICO credit scoring system:
- How late you were
- How much you owe
- How recently you were late
- How many late or missed payments you have
Other negative information such as a bankruptcy or an account in collections are also factored into your score and will catch your lender’s attention.
If you have a credit history filled with late payments, this indicates to your lender that you struggle with maintaining on-time payments and are more likely to continue making late payments while repaying a mortgage.
How to avoid this issue: Maintain a track record of on-time payments for all your existing debt before and after you apply for a mortgage. If you have a few late payments on your credit report, keep in mind the further removed you are from your late payments, the less impact they’ll have on your credit score.
2. Your job status has changed
Rapidly switching employers and being in-between jobs can be grounds for an application denial.
Why this matters
Mortgage lenders like to see evidence of steady employment, especially for the last two years. They’ll usually verify this by reviewing your pay stubs and W-2s. If your employment history is spotty and doesn’t demonstrate that you’ve been maintaining consistent employment, you’re considered a higher risk and likely won’t be approved.
How to avoid this issue: Limit your job changes before you apply for a mortgage. A good rule of thumb is have had no more than three employers in the last two years and no time between those jobs where you were unemployed. Additionally, avoid any job changes after applying for a mortgage, as this could derail the process.
3. Your bank account has some red flags
Lenders will request at least the last few months of statements from your banking institution to see how your finances are holding up. Because they’re closely reviewing those documents, any suspicious-looking activity will present some red flags. Suspicious activity might include, but isn’t limited to:
- Using multiple P.O. boxes or frequently changing addresses.
- Conducting wire transfers to and from places known for their tax haven status or terrorism affiliation.
- Making large cash payments from sources that typically aren’t associated with cash-based transactions.
- Using money orders that are sequentially numbered.
Why this matters
Combing through your financial profile is part of the mortgage lending process. If you frequently overdraft your checking account, that won’t reflect well on your reputation as a prospective borrower. On the other end of the spectrum, having large deposits that aren’t accounted for can also cause problems.
You’ll need to verify every income source you want counted as part of your application, said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C. Any side hustles you have need to be documented and verified if you want that information factored into your ability to afford the mortgage. One way to verify income is by providing your lender with pay stubs or W-2s from your supplemental income sources.
“If you’re relying on every penny, that can really be a roadblock,” McClary said.
How to avoid this issue: Keep track of all your income-related documents and provide them to your lender when they’re requested.
4. You omitted information on your application
Don’t try to outsmart your mortgage lender by withholding information that is pertinent to your loan application, such as neglecting to mention alimony payments or an unpaid federal tax debt. And even if you do so unintentionally, it might be too late to correct it once it’s discovered.
Why this matters
Your loan officer should carefully review your application to make sure it’s filled out completely and accurately. A small error like missing a zero on your income or accidentally skipping a section could mean losing your dream home.
There’s also the chance you forgot to include information that the underwriter caught later in the more extensive screening process, such as money owed to the IRS.
How to avoid this issue: Disclose all of your debt, judgments and other financial-related details to your loan officer upfront. Otherwise, they may not be able to help you if it comes up and disqualifies you later on.
5. You recently opened a new credit account
One of the main ways homebuyers can self-sabotage their chances at being fully approved for a home loan is by making decisions — such as opening a new credit card or financing a new vehicle — that affect their credit profile, after getting an initial green light from their lender in the form of a mortgage preapproval.
A preapproval is conditional and based on where your credit reports, credit scores, income and overall financial picture stand at the time the preapproval was granted. Any changes you make to your finances can prevent you from buying a home.
Why this matters
When you add a new set of debt to your plate, that increases your debt-to-income (DTI) ratio. Your DTI ratio is the percentage of your gross monthly income that is used to repay debt. In most cases, mortgage lenders like to see a DTI ratio of 43% or less. Adding any type of credit account will jeopardize your DTI ratio and potentially push you into denial territory.
“Everybody focuses so much on the credit report, but the other question is: Are you financing a home that you can actually afford?” McClary said.
How to avoid this issue: Don’t make any financial decisions that will result in an inquiry on your credit reports and an increase in your debt load. Practice this for 6-12 months before you start the homebuying process, McClary advised. You’ll also need to continue this practice until after you get your house keys. Additionally, try to find ways to boost your income to pay off debt.
6. You don’t have enough cash to close
Borrowing a mortgage will cost you more than just your monthly mortgage payment. In most cases, you’ll have a required down payment and closing costs to pay for. If you don’t have proof that you can cover those costs, your application may be rejected.
Why this matters
Your mortgage lender will want you to have some skin in the game for your home purchase, which would be your down payment. There are also the closing costs you’ll be charged for taking out a mortgage.
During the approval process, your lender will request that you provide proof of funds to close on your loan. Some examples of proof include bank statements, retirement account statements and gift letters with the donor’s proof of funds — in cases when a loved one is helping you meet your “cash to close” amount. Be sure your gift money is coming from an acceptable source, however.
Failing to provide the necessary documents can lead to a mortgage denial.
How to avoid this issue: Save aggressively for your down payment and closing costs. It’s possible to qualify for a mortgage with as little as 3% down, depending on your credit score. Your closing costs can range from 2% to 5% of your home’s purchase price.
If you’re borrowing or withdrawing from a retirement account, supply documentation from your plan provider that shows you qualify to do so, along with statements that verify you have the funds available to use for your home purchase. And if you need some extra help, consider a down payment assistance program.
7. Your home appraisal doesn’t match up
Getting a full mortgage approval is also contingent upon having the home appraised. Any problems that come up during the appraisal process can stop you from getting your house keys.
Why this matters
A home appraisal is an unbiased estimate of a home’s value. Your mortgage lender will more than likely require an appraisal for the home you’re trying to buy in order to verify that the purchase price checks out. If the appraisal aligns with the sales price or is slightly higher, no worries there. But if the appraisal is lower than the sales price, your lender might deny your application.
How to avoid this issue: If you have the financial capacity to do so, you can make up the difference in cash. You could also try negotiating a lower sales price with the home seller.
How to move forward after a mortgage denial
Once you’ve been denied, it’s time to figure out how to work toward eventually getting approved. Keep these tips in mind on how to move forward.
- Find out why you were denied. Mortgage lenders are required to give you an explanation for why they denied your mortgage application if you submit a request for that information in writing, according to the CFPB. They must also provide you with a copy of the credit report that factored into your denial.
- Improve your circumstances. Whether it’s a high DTI ratio, too short of an employment history or another common setback, take some time to correct those issues and better position yourself for mortgage approval in the future.
- Consider housing counseling. In cases where you were denied for credit or income-related reasons, McClary suggests reaching out to a nonprofit housing counseling agency for help addressing those issues.
Everyone’s timeline is different for when they should apply again, so be sure to check with your lender or a housing counselor for guidance on next steps.
The bottom line
Being denied for a mortgage can be a discouraging experience, but it doesn’t mean all hope is lost for your goal of homeownership.
Once you’re clear on why you were denied, you can make the necessary changes so you’re not rejected the next time around.
“The more you do leading up to the loan application to make sure that you check and double-check every step, then the easier the actual homebuying process will be,” McClary said, “because that financing piece is locked down and you’ve addressed all the issues that could potentially be roadblocks.”
Here’s what you need to know about the most important factors to getting approved for a mortgage.
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