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7 Reasons Your Mortgage Application Was Denied

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

There are few things more nerve-racking for homebuyers than waiting to find out if they were approved for a mortgage loan.

Nearly 627,000 mortgage applications were denied in 2015, according to the latest data from the Federal Reserve, down slightly (-1.1%) year over year. If your mortgage application was denied, you may be naturally curious as to why you failed to pass muster with your lender.

There are many reasons you could have been denied, even if you’re extremely wealthy or have a perfect 850 credit score. We spoke with several mortgage experts to find out where prospective homebuyers are tripping up in the mortgage process.

Here are seven reasons your mortgage application could be denied:

You recently opened a new credit card or personal loan

Taking on new debts prior to beginning the mortgage application process is a “big no-no,” says Denver, Colo.-based loan officer Jason Kauffman. That includes every type of debt — from credit cards and personal loans to buying a car or financing furniture for your new digs.

That’s because lenders will have to factor any new debt into your debt-to-income ratio.

Your debt-to-income ratio is fairly simple to calculate: Add up all your monthly debt payments and divide that number by your monthly gross income.

A good rule of thumb is to avoid opening or applying for any new debts during the six months prior to applying for your mortgage loan, according to Larry Bettag, attorney and vice president of Cherry Creek Mortgage in Saint Charles, Ill.

For a conventional mortgage loan, lenders like to see a debt-to-income ratio below 40%. And if you’re toeing the line of 40% already, any new debts can easily nudge you over.

Rick Herrick, a loan officer at Bedford, N.H.-based Loan Originator told MagnifyMoney about a time a client opened up a Best Buy credit card in order to save 10% on his purchase just before closing on a new home. Before they were able to close his loan, they had to get a statement from Best Buy showing what his payments would be, and the store refused to do so until the first billing cycle was complete.

“Just avoid it all by not opening a new line of credit. If you do, your second call needs to be to your loan officer,” says Herrick. “Talk to your loan officer if you’re having your credit pulled for any reason whatsoever.”

Your job status has changed

Most lenders prefer to see two consistent years of employment, according to Kauffman. So if you recently lost your job or started a new job for any reason during the loan process, it could hurt your chances of approval.

Changing employment during the process can be a deal killer, but Herrick says it may not be as big a deal if there is very high demand for your job in the area and you are highly likely to keep your new job or get a new one quickly. For example, if you’re an educator buying a home in an area with a shortage of educators or a brain surgeon buying a home just about anywhere, you should be OK if you’re just starting a new job.

If you have a less-portable profession and get a new job, you may need to have your new employer verify your employment with an offer letter and submit pay stubs to requalify for approval. Even then, some employers may not agree to or be able to verify your employment. Furthermore, if your salary includes bonuses, many employers won’t guarantee them.

Bettag says one of his clients found out he lost his job the day before they were due to close, when Bettag called his employer for one last check of his employment status. “He was in tears. He found out at 10 a.m. Friday, and we were supposed to close on Saturday.”

You’ve been missing debt payments

During the loan process, any recent negative activity on your credit report, which goes back seven years, can raise concerns. The real danger zone is any activity reported within the last two years, says Bettag, which is the time period lenders play closest attention to.

That’s why he encourages loan applicants to make sure their credit reports are accurate and that old items that should have fallen off your report after seven years aren’t still appearing.

“Many things show on credit reports beyond seven years. That’s a huge issue, so we want to get dated items removed at the bureau level,” Bettag says.

For first-time homebuyers, he cautions against making any late payments six months prior to applying for a mortgage. They won’t always be a total deal-breaker, but they can obviously ding your credit, and a lower credit score can lead to a loan denial or a more expensive mortgage rate.

Existing homeowners, Bettag says, shouldn’t have any late mortgage payments in the 12 months prior to applying for a new mortgage or a refinance.

“There are workarounds, but it can be as laborious as brain surgery,” says Bettag.

You accepted a monetary gift

Your lender will be on the lookout for any out-of-place deposits to your bank accounts during the approval process. Bettag advises homebuyers not to accept any large monetary gifts at least two months or longer before you apply, and to keep a paper trail if the lender has any questions.

Any cash that can’t be traced back to a verifiable source, such as an annual bonus, or a gift from a family friend, could raise red flags.

This can be tricky for homebuyers who are relying on help from family to purchase their home. If you receive a gift of money for a down payment, it has to be deemed “acceptable” by your lender. The definition of acceptable depends on the type of mortgage loan that you are applying for and the laws that govern the process in your state.

For example, Bettag says, the Federal Housing Authority doesn’t care if a borrower’s entire down payment comes as a gift when they are applying for an FHA loan. However, the gifted funds may not be eligible to use as a down payment for a conventional loan through a bank.

You moved a large amount of money around

Ideally, avoid moving large sums of money about two months before applying.

Herrick says many borrowers make the mistake of shuffling too much cash around just before co-signing, making themselves look suspicious to bank regulators. Herrick says not to move anything more than $1,000 at a time, and none if you can help yourself.

For example, If you’re considering moving money from all of your savings accounts into one account to deliver the cashier’s check for the down payment, don’t do it. You don’t need to have everything in one account for the cashier’s check for your closing. You can submit multiple cashier’s checks. All the lender cares about is that all of the money adds up. You may be able to simply avoid some of this hassle by arranging to pay using a wire transfer. Just be sure to schedule it in time.

You overdrafted your checking account

If you have a credit issue already, says Bettag, overdrafting your checking account can be a deal-breaker, but it won’t cause as much of an issue if you have great credit and offer a good down payment. Still avoid overdrafting for at least two months prior to applying for the mortgage loan.

You may be the type to keep a low checking account balance in favor of saving more money. But if an unexpected bill could risk overdrafting your account, try keeping a few extra dollars in the account for padding, just in case.

You forgot to include debts or other information on your loan application

Your loan officer should carefully review your application to make sure it’s filled out completely and accurately. Missing a zero on your income, or accidentally skipping a section, for example, could mean rejection. A small mistake could mean losing your dream home.

There’s also the chance you accidentally omitted information the underwriter caught in the more extensive screening process, like money owed to the IRS. Disclose all of your debt to your loan officer up front. Otherwise, they may not be able to help you if the debt comes up and disqualifies you for your dream home later on.

If you owe the IRS money and are in a payment plan, Bettag says your loan officer can still work with you. However, they want to see that you’ve been in a plan for at least three months and made on-time payments to move forward.

“Can you imagine not paying your IRS debt, getting into a payment plan, and then not paying on the agreed plan? Not cool for lenders to see, but we do,” says Bettag.

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The Bottom Line

There is no hard and fast rule on how long before you begin the mortgage process that you should heed these warnings. It all varies, according to Bettag. If you have excellent credit and a strong income, you might be able to get away with a recently opened credit card or other discrepancies — minor faults that might totally derail the application of a person who has bad credit and inconsistent income.

Whatever the case may be, Bettag encourages prospective homebuyers to stick to one general rule: “Don’t do anything until you’ve consulted with your loan officer.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
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Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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5 Questions to Ask Yourself Before Buying a House

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Buying a House

The housing market is heating up and so is the homebuying competition. Recent data from the National Association of Realtors show that pending home sales are up nearly 5%.

Still, don’t let the increased activity pressure you into getting a mortgage before you’re truly ready. Take inventory of your personal and financial preparedness first.

Step back and ask yourself the following questions before you start your homebuying journey.

Question 1 How much house can I afford?

Prior to your house hunt, be sure you have a concrete understanding of exactly how much house you can comfortably afford. A common way to determine affordability is to get a mortgage preapproval.

A preapproval is a letter from a mortgage lender that tells you how much money you might qualify to borrow for a home purchase along with an estimated interest rate. In order to get preapproved, you’ll need to submit several documents and other pieces of information to the lender, including:

  • A government-issued I.D. (e.g. driver’s license)
  • Social Security number
  • Pay stubs
  • Bank statements
  • Tax returns

The lender will also pull all three of your credit reports and scores to help determine your creditworthiness.

Getting preapproved for a mortgage not only gives you a price range to use when you start shopping for a house; it also gives you an advantage over other buyers, and legitimizes you when it’s time to put in offers.

Question 2 How long do I plan to live in the home?

Homeownership is a commitment. You’re committing to the mortgage you borrow, the home you choose and the surrounding community — this isn’t the case as a renter.

The financial commitment is just as real as the moral one. Financial experts commonly say it takes five years to make the money back you spent on your house, should you decide to sell it. Owners typically stay in their home for a median of 10 years before selling, according to the Homebuyer and Seller Generational Trends Report from the National Association of Realtors.

Question 3 Am I financially secure enough for homeownership?

Don’t focus solely on stashing away just enough cash to cover your down payment. Factor in the many other costs of buying and owning a home.

Before you’re handed the keys, you also have closing costs to pay. This could run you anywhere from 2% to 5% of your home’s purchase price — not to mention all the deposits and expenses related to moving in.

You’ll also want to have a sizable cash cushion for maintenance and unexpected expenses. Aim to have at least three to six months’ worth of your living expenses saved in an emergency fund, such as a personal savings account. Be mindful of how your expenses might change as a homeowner and tweak your savings amount to reflect those changes.

Another consideration is how you’re handling your current debt obligations. If you’re struggling to stay afloat as is, a mortgage lender likely won’t approve you. That’s because one of the main qualification factors a lender pays close attention to is your debt-to-income ratio, or the percentage of your income that is used to pay your debt every month. A good DTI ratio for all your debt payments, including your estimated monthly mortgage payment, is a maximum of 43%.

Question 4 Is my credit history positive enough?

You’ll need to demonstrate your creditworthiness as a potential mortgage borrower before you’re approved. Start by pulling your credit reports from all three credit reporting bureaus — Equifax, Experian and TransUnion — by visiting AnnualCreditReport.com. You’re entitled to one free report from each bureau once a year.

Review your reports for any negative remarks and errors. Do you have a history of multiple late payments? Are your credit card balances close to the limit? If you see room for improvement, you might need to postpone your homeownership goals until your credit profile is in a better position. Lenders want to see overwhelmingly positive credit habits from mortgage applicants.

You’ll generally want to have at least a 580 credit score to qualify for an FHA loan and a 620 score for a conventional loan. Read our guide on minimum mortgage requirements for more information on credit score specifics for other mortgage products.

Question 5 Which mortgage type is best for me?

There are several different mortgage products available and one may fit your financial situation better than others. For example, if you don’t have a lot of money for a down payment and have a credit score in the 600 to 700 range, you might want to go with an FHA loan, which requires just a 3.5% down payment. On the other hand, if you have at least a 5% down payment and a score above 700, you could benefit from a conventional mortgage.

There are also VA loans, which cater to military service members and veterans, USDA loans that focus on homes in designated rural areas and several other options. Speak with your lender to get a rundown of their available mortgage programs.

The bottom line

It takes some time and effort to decide to buy a home. To help in your decision, it’ll be worthwhile to develop answers to the above questions.

Once you’re ready to take that leap, shop around with multiple lenders to get the best deal. Data show that homebuyers stand to save more than $36,000 in interest on a $300,000 mortgage over a 30-year term by shopping around, according to LendingTree’s Mortgage Rate Competition Index.

Review the Loan Estimates you’ll receive from each mortgage lender after submitting your application to compare interest rates and the many other costs that come with borrowing.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Guide to Reverse Mortgages: Is the Income Worth the Risk?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Although they have received increased attention in recent years, many consumers still have a hard time fully understanding what reverse mortgages are, how they work and who they benefit.

Continue reading for a thorough explanation on the above topics, plus a discussion of the advantages and disadvantages of this complex financial product.

What is a reverse mortgage?

A reverse mortgage is a loan that allows senior homeowners to borrow money against their home’s equity. Instead of making monthly payments to their mortgage lender, the homeowner receives money every month from their lender — or receives a larger amount in a lump sum. The balance owed to the lender grows over time and isn’t due until the homeowner moves out, sells the property or passes away.

Reverse mortgages are the opposite of a “forward,” or traditional, mortgage, which allows a borrower to purchase a home and repay their lender on a monthly basis. With traditional mortgages, the balance owed reduces over time until it’s completely paid off.

In both forward and reverse mortgages, the property is used as collateral for the loan. Only homeowners who are at least 62 years old can take out a reverse mortgage.

Reverse mortgage types

There are three types of reverse mortgages available to homeowners depending on their situation.

Home Equity Conversion Mortgage (HECM)

This is the most common reverse mortgage and is backed by the Federal Housing Administration (FHA). A HECM offers more flexibility in terms of how payments are disbursed to borrowers. Payment options include:

  • A single, lump-sum disbursement.
  • Fixed monthly advances over a specified period of time.
  • Fixed monthly advances as long as you live in your home.
  • A line of credit.
  • A combination of a credit line and monthly payments.

Single-purpose reverse mortgage

As the name suggests, this type of loan is used for a single purpose, such as covering home repairs or property taxes. Loan proceeds are typically distributed in a lump sum to cover the homeowner’s financial need. Single-purpose reverse mortgages are offered by nonprofit agencies and some local and state governments.

Proprietary reverse mortgage

This loan is offered by private lenders and usually benefits borrowers with high-value homes because they may receive bigger advances.

How a reverse mortgage works

A reverse mortgage is a loan that takes a portion of your equity and converts it into payments made to you. The money you receive is typically tax-free, according to the Federal Trade Commission. Unlike a traditional home equity loan, you are not required to pay back a reverse mortgage on a set schedule.

Let’s look at an example of how a reverse mortgage works:

John is retired, has paid off his mortgage and owns his home outright. He wants to stay in his home, but needs to supplement the monthly income he receives from Social Security and his pension.

The total amount John can borrow using a reverse mortgage is based on his age and that of his spouse, current mortgage rates and the home’s value; these limits are imposed by HUD. Here’s how the numbers could possibly work out for him, based on LendingTree’s reverse mortgage calculator:

Value of the home$300,000
Title holder’s age70
Mortgage balance$0
Lump sum estimate$145,902

Based on the calculator, John might qualify for as much as $145,902 if he decides to go the single disbursement route. An advantage of getting a lump-sum payment from your lender is that the interest rate will be fixed, unlike the other options which have an adjustable interest rate.

The reverse mortgage loan limit is $726,525 for 2019, which is 150% of the conforming loan limit of $484,350 for forward mortgages. Still, even if the amount of equity you have is lower than the loan limit, you won’t be allowed to borrow the full amount.

The amount you’re allowed to borrow for a reverse mortgage is determined by the age of the youngest borrower, the home’s appraised value and the anticipated interest rate. Generally, the older you are, the more you can borrow.

Costs and fees

The most common fees associated with a reverse mortgage include:

  • A loan origination fee, which could cost up to 2% of the loan amount.
  • An initial mortgage insurance premium, which is a flat 2% fee.
  • An annual mortgage insurance premium, which is 0.5%.
  • Housing counseling, which usually costs about $125.

There are also additional closing costs and interest fees.

Reverse mortgage requirements

Senior homeowners who are interested in borrowing a reverse mortgage must meet the following requirements:

  • Be at least age 62 or older.
  • Own your home outright or have a small remaining mortgage balance. If you still have a loan, a good rule of thumb is to have at least 50% equity in your home, because you’ll first need to use the reverse mortgage funds to pay off the outstanding balance on your forward mortgage.
  • Must be seeking a loan backed by your primary residence.
  • Have no federal debt delinquencies, including student loans and taxes.
  • Proof of sufficient income to cover your property taxes, homeowners insurance and other housing-related expenses.
  • Demonstrate your creditworthiness as a potential borrower. While there isn’t a minimum credit score requirement, it helps your case to be responsible with your credit usage by maintaining on-time payments, keeping your balances low, etc.
  • Participate in an information session with a HUD-approved reverse mortgage counselor.

Most reverse mortgages have what’s called a “non-recourse feature,” which means if the lender takes legal action against you due to default, the lender can only use the home to satisfy the defaulted debt and can’t come after you for any difference between how much you owe and the home’s value. This also applies to your heirs in the event you pass away and the home is sold to repay the debt.

4 things to watch for when taking out a reverse mortgage

Just like all other financial products, a reverse mortgage comes with its share of risks, which typically include the following:

Higher financing costs

Compared with a forward mortgage, the fees associated with a reverse mortgage are more costly. As an example, a HECM lender can charge an origination fee equal to $2,500 or 2% of the first $200,000 of your home’s value, whichever is greater, plus another 1% for any home value amount above $200,000. The maximum allowable origination fee is $6,000. By contrast, the average origination fee for a traditional mortgage is just under $1,000, according to data from Value Penguin, a LendingTree company.

Increase in debt

You receive income from a reverse mortgage, but it’s still a loan that you or your estate will be responsible for repaying. Since you’re borrowing from your home’s available equity, your loan balance increases over time, which adds to your outstanding debt load.

No tax deductibility

The IRS treats the income received from reverse mortgages as loan advances, and for that reason any interest paid on a reverse mortgage isn’t tax-deductible.

Rising interest rates

The majority of reverse mortgage products have an adjustable interest rate, which is subject to market fluctuations. Your rate will be at a high risk of increasing very quickly.

Reverse mortgage pros and cons

Consider the following benefits and drawbacks before applying for a reverse mortgage:

Pros

  • Increase in your monthly income. If you opt for monthly payments from your lender, a reverse mortgage gives you additional income every month on top of any retirement income you already receive.
  • Flexibility to use the funds how you see fit. If you take out a HECM or proprietary reverse mortgage, there aren’t restrictions imposed on what the money is used for.
  • Ability to stay in your home. Not only do you get to keep your home, but you can keep it in your family after you pass away if your estate is able to fully repay the reverse mortgage.
  • Free from underwater mortgage stress. If your loan balance becomes greater than your home’s value, you likely won’t be on the hook for the difference between the two.

Cons

  • High upfront costs. There are origination fees, mortgage insurance expenses and closing costs in a reverse mortgage transaction. If you choose to cover these costs with your loan, you’ll receive a smaller payout.
  • Decrease in your home equity. With a reverse mortgage, your loan balance grows and your available equity shrinks over time.
  • Loan becomes due if you have a change of heart. If you decide you want to move out of or sell your home, the outstanding balance on your reverse mortgage becomes due immediately.
  • Adjustable-rate mortgage. Most reverse mortgages have adjustable interest rates that will likely increase over time. As of January 2019, the latest month for which data are available, reverse mortgage rates range from 3.583% to 7.019%, according to FHA statistics.

Shopping for a reverse mortgage

The first few steps you should take when you decide you want to apply for a reverse mortgage are to educate yourself on how reverse mortgage programs work, and to determine which loan type works best for your financial situation.

Once you have those details figured out, gather multiple quotes from reverse mortgage lenders and compare the costs and fees to find the best deal available. Ask questions about any and everything that seems unclear, and don’t forget to consult a HUD-approved reverse mortgage counselor for extra help.

Consider the interest rate each lender charges, as well as the origination fee and other closing costs. Additionally, work with each lender to determine how folding the financing costs into your loan will affect the amount you ultimately receive and whether it makes sense to pay those costs out-of-pocket instead.

After you’ve closed on a reverse mortgage and — for some unforeseen reason — decide you no longer need it, you have a “right to rescission,” which means you’re allowed to cancel the deal without penalty. You have a minimum of three business days after the loan closes to notify your lender in writing, and the lender has 20 days to refund any money you’ve paid toward the financing of that loan.

FAQs about reverse mortgages

The timeline varies by lender, but the lending process could take two months or longer. Be sure to ask your loan officer for a rough idea.

No, interest paid on reverse mortgage balances is not tax-deductible.

When you pass away, your reverse mortgage becomes due and payable. If you have a surviving spouse or heirs, they will be responsible for paying back the loan, which might involve selling your house.

For HECM loans, you can find an FHA-approved lender through HUD’s website. For other types of reverse mortgages, a quick online search will reveal public and private lenders in your area.

Reverse mortgage alternatives

A reverse mortgage isn’t the best option for every senior homeowner. If you need money to fund renovations, repairs or other expenses, here are some alternative options.

Borrow a home equity loan or line of credit

If you have a sizeable amount of equity in your home, you might qualify to take out a home equity loan or home equity line of credit (HELOC). You borrow a lump sum of cash with a home equity loan and you’re granted a line of credit, similar to a credit card, with a HELOC. Either of these products might work better if you’re still employed, as they require you to make monthly payments after borrowing the funds.

Refinance your existing mortgage

For those borrowers who still have a mortgage balance, you could refinance your loan by extending the term and lowering your monthly payment amount, which frees up some cash in your budget. You could take advantage of a cash-out refinance, which allows you to borrow a new mortgage that’s larger than what you actually need for your house and pocket the difference.

Rent out a room

Empty-nesters with more home space than they actually need might benefit from renting out one of their bedrooms either through short- or long-term rentals. This generates extra income that can be used for remodeling, traveling or other expenses.

Don’t forget your retirement accounts

As long as you’re old enough to tap your 401(k), IRA or other retirement account without any early withdrawal penalties, going this route is a less costly way to supplement your income. Generally speaking, you can withdraw from your retirement accounts without penalty starting at age 59 ½.

The bottom line

Reverse mortgages come with additional considerations that may not always be a concern for forward mortgages, but they may provide relief for some older homeowners who want to supplement their income and also age in place.

If you can comfortably manage your insurance, tax and other obligations related to homeownership, maintain your property and keep it in good condition, and are confident that your heirs will take care of your home after your passing, a reverse mortgage could work well for you.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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