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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
Brittney Laryea |

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

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Is Buying an Investment Property Right for You?

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.

Real estate has always been a popular strategy for building wealth. Beyond amassing equity in the house you live in, you could possibly turn a profit by purchasing investment properties and charging others rent. In an ideal situation, an investment property could rise in value while renters foot the bill for the mortgage and even repairs.The good news for investment-property owners is there is money to be made in being a landlord. A 2018 study by apartment search website RENTCafé found that millennials alone spend approximately $93,000 in rent by the time they’re 30.

However, buying an investment property isn’t as easy as purchasing a house you plan to live in yourself. Not only are the loan eligibility requirements stricter, but you’ll likely have to come up with more cash. If you’ve been thinking about purchasing your first investment property, here are some factors you should consider first.

You may pay higher interest rates. Lenders charge higher interest rates when they believe there is a higher risk that the borrower will default. Investment properties are considered riskier than buyer-occupied homes because lenders figure people are likely to try harder to pay the mortgage on the home they live in than they would for an investment property if times get tough. As a result, the interest rates are typically a point or more higher for investment properties, said Rick Bettencourt Jr., a mortgage professional based in Danvers, Mass., and board president for the National Association of Mortgage Brokers.

Interest rates on multi-unit dwellings tend to be the highest of all. “Buying an investment property that’s a multi-family unit is the riskiest type of home loan that you can get,” Bettencourt said. As with other types of home loans, the lower your credit score, the higher the interest rate you’ll pay. Rising interest rates, such as in the current environment, will also likely have an impact on the buyer’s borrowing power. As mortgage rates rise, investment properties may stay on the market for a longer period of time, Bettencourt said.

You may need a larger down payment. When you buy a house that you plan to live in, many lenders let you put down less than 20% as long as you pay mortgage insurance. However, mortgage insurance is not an option for borrowers who are buying investment properties. Borrowers will typically have to put down 20% in order to be approved for a loan — and to get the lowest rates, expect to put down 25%, Bettencourt said.

You’ll likely need more in cash reserves. Not only will you need to come up with the cash for the down payment, but lenders also typically require investment property buyers to have enough stashed away to cover several months of mortgage payments. A good rule of thumb is to have six months of mortgage payments, so if your mortgage payment is $2,000, you’ll need $12,000 Bettencourt said. Assets held in checking and savings accounts, CDs, mutual funds and retirement accounts can all count toward your reserves.

Rental income may be included in your debt-to-income (DTI) ratio. Lenders will consider how much income you have relative to debt when determining whether they’ll lend you money and how much you will qualify for. They want to know that despite current debt obligations, you have enough money coming in to pay the mortgage. When you buy a rental property, lenders not only consider your current income, but they consider how much money you could potentially make charging rent. That means they calculate a higher income for you than you currently have, and as a result, you could likely qualify for a more expensive rental property than a house you intended to live in.

Your credit rating may be more important. Because lenders consider investment property financing a riskier type of loan, they’re going to be looking a lot harder at your credit score when determining whether to lend you money. To get the best rates, many lenders will look for a minimum score of 720, but if you can get your score in the 740 to 760 range, that would be ideal, Bettencourt said.

You may incur other costs. Don’t just consider the costs of buying the property — also factor in whether you’ll be able to maintain it. Could you afford the costs of hiring contractors when you need repairs? Have you considered the costs of property maintenance and utilities?
“If the cost to maintain the property is going to be expensive, that will eat into any of your profits,” Bettencourt said. Also, consider whether you’ll be able to pay the mortgage if you’re between tenants for a long period.

Financing your investment property

Once you’ve weighed these factors and decided that an investment property is for you, the next step is determining how to finance it. Here are some options to think about.

Conventional loans. If you have a high credit score and assets, a conventional loan could be your best bet. Keep in mind that conventional lenders likely will have the strictest requirements. For example, Wells Fargo requires borrowers to have two years of property management experience in order to use potential rental income to help qualify for the loan.

Home equity loan or HELOC. Depending on how much equity you have in your principal residence, you may be able to leverage it to pay for an investment property. One reason this may be a good option: Home equity loans and home equity lines of credit, or HELOCs, typically come with lower interest rates than investment property loans because they don’t carry as much risk. However, there’s always the risk that if your investment property struggles and you can no longer afford the payments, you could end up losing your house as well.

Financing through the seller. In some cases, owner financing may be available. With such an agreement, you and the seller would decide on the terms of the loan and you’d make payments directly to the seller rather than going through a traditional lender. Without a lender, the requirements may be less stringent and there may be less paperwork involved. If you finance through the seller, know that the transaction might not be on your credit report unless the seller reports it to a credit reporting agency.

Loans from private lenders or investors. If you’re looking for a loan with more flexibility, you may be able to get it by finding a private lender or investor who is willing to underwrite your deal. They may be more willing to negotiate with you about the terms of the deal than a traditional lender. Some peer-to-peer lending networks bring together borrowers with potential investors for real estate projects.

FHA loans and VA loans. Many homebuyers find loans backed by the Federal Housing Administration and the U.S. Department of Veterans Affairs appealing because they allow you to put down less than 20% on a property. FHA loans allow you to put down as little as 3.5%, while VA loans can be taken out with no down payment. For the most part, you can’t use FHA or VA loans for purchasing an investment property because they are designated for owner-occupied homes. But there is an exception: If you buy a house with up to four units and live in one of them, you may be able to satisfy that requirement.

Buying your first investment property can get you started on building your own real estate empire. But like all investments, real estate comes with risks. The housing market could crash or you could be stuck paying the investment property’s mortgage between renters. Before you make such a major investment, it’s important to consider how you would handle a downturn in the housing market or other potential challenges. If you do decide that buying an investment property is for you, do your research and ensure that your financing strategy will benefit you in the long term.

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.

Tamara Holmes
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Tamara Holmes is a writer at MagnifyMoney. You can email Tamara here

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7 Tips for Taking Out a Home Equity Loan

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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If you are a homeowner looking to borrow a hefty sum, chances are you’ve already considered a home equity loan. Home equity loans are granted based on the equity value of your home — that is, the overall value of the property minus the amount owed on your mortgage.Tapping into this equity is a great way to get access to funds for large home improvement projects or financial needs like paying for college, but this option should be exercised cautiously. With your home as the main collateral, foreclosure becomes a serious risk if you fail to pay back your lender. As the borrower, it’s also important to fully understand your loan agreement before you sign, especially in today’s climate of rising interest rates and changing tax laws. Here are a few tips to get you started in the right direction:

1. Consider all options before taking out a home equity loan

Home equity loans are typically the first form of borrowing that comes to mind for homeowners, but it’s good to be aware of other options. Depending on your financial goals, a home equity line of credit (HELOC) might make more sense. Unlike the fixed sum of a home equity loan, a HELOC is a fluid line of credit that allows you to borrow what you want within a credit limit and pay back only what you borrow. It’s a good choice for people who want the option to borrow a large sum without necessarily commiting to the debt up front.

Just like credit cards, HELOCs vary drastically. According to the Consumer Financial Protection Bureau, they usually have a variable interest rate, but borrowers should make sure they understand all stipulations of the loan agreement before signing. These include when they can withdraw funds (ask about a minimum wait period and maximum draw period), additional closing costs and any minimum requirements surrounding the home’s value. If the value decreases significantly, lenders may choose to limit your credit line.

Other borrowing options for homeowners include cash-out refinancing and personal loans. Cash-out refinancing is meant for homeowners looking to lower the interest rates on their mortgage and gain access to additional funds. These typically make the most sense for borrowers who need a significant additional amount and should only be considered when the terms of the new agreement are better than those of the original mortgage.

Keep in mind that all of these borrowing methods put your home at risk and can include significant closing costs. If you only need to borrow a small sum on a short-term basis, you might be better off exploring your options with personal loans.

2. Know tax rules

The Tax Cuts and Jobs Act of 2017 understandably raises concerns for many prospective borrowers, but there are really only a handful of changes that relate to home equity loans and lines of credit.

The first revolves around paid interest and how you can deduct it from your taxes. According to the IRS, the new law states that interest paid on home equity loans and lines of credit is only eligible for deduction if the loans are used to “buy, build or substantially improve” the taxpayer’s principal residence. This means that you won’t be able to deduct interest on a loan used for something like college tuition.

Paid interest deductions are also limited now to homes with mortgages of $750,000 and less, but with the average 2018 new U.S. mortgage of $260,386, this cap isn’t likely to affect the majority of borrowers.

3. Know when long-term debt doesn’t make sense

Once again, home equity loans aren’t the right choice for every borrower. If you’re considering taking out a loan to finance something short-term, like a luxury vacation or clothing, you’d be better off looking into other options that don’t put your house at risk.

4. Know when long-term debt makes sense

Home equity loans and credit lines are better suited for borrowers looking to make long-term investments that add value to their property or create a higher earning potential for their household. This would include things like college tuition and remodeling projects.

5. Keep your total home loan debt below 80%

When it comes to deciding how much money to let you borrow, lenders use what’s called loan-to-value ratio (LTV), which is calculated by dividing the loan amount by the value of your property. While this term usually refers to mortgages, the numbers apply similarly to home equity loans and how much a lender will let you borrow.

In order to qualify for a home equity loan you should maintain a minimum of 20% equity in the home — or said another way, you should always keep your total loan debt below 80%. If your total loan debt exceeds 80%, your lender may ask you to take out private mortgage insurance (PMI). The amount you pay for a PMI will vary based on your LTV and credit score, but ultimately it’s something extra you’ll have to buy to protect the lender — not you.

Another reason to keep your total debt below 80% is to maintain a financial cushion in the event that you suddenly need to sell your home. Using the same logic as the lenders, this ratio ideally would allow you to cut your losses, even in the event that you were forced to sell at a lower amount or with outstanding debts to pay.

6. Shop around

Like anything else, the best way to get a fair loan agreement is to shop around. Ask friends for lender recommendations, and talk to as many of them as you can. Have them go over agreements with you and be sure you understand all of the terms, conditions and fees involved. Once you’ve received a few different loan plans, don’t be afraid to negotiate and make them compete for your business.

According to the Federal Trade Commission (FTC), lenders and brokers have been known to offer different prices for the same loan terms — often because they’re allowed to keep the difference. A good way to start the negotiation process is to ask a lender to write down all the costs of the loan and then ask them to waive or lower certain components. Use a sheet like this one to compare final terms and get the best deal.

7. Have a plan

Don’t wait until your loan agreement is signed to think about the repayment process. Your repayment plan will vary depending on the term and interest rates of your loan agreement. Generally, the longer the term of your loan (or the longer it takes you to repay it), the more you’ll end up paying. Save money on your loans by making a plan to pay them off as soon as possible. By contributing even a little more each month, you’ll end up saving a lot on interest.

Home equity loans are a good resource for homeowners in good financial standing who need funds for a long-term investment. But unlike other forms of debt, these loans could literally cost you your home, and should only be taken out with a solid repayment plan in place.

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.

Larissa Runkle
Larissa Runkle |

Larissa Runkle is a writer at MagnifyMoney. You can email Larissa here

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