When you are ready and excited to buy your new home, the last thing you want to hear is not approved. This can be devastating news and can put a huge damper on your future plans.
Applying for a mortgage can honestly be exhausting and requires a ton of work, leaving borrowers overwhelmed and stressed at times.
Although there isn’t much you can do to avoid a lengthy process, there are 9 factors that you should stay on top of that can keep you front getting your dream home.
9 Factors That Can Keep You from Getting a Mortgage Loan
Before filling out your mortgage application, take a quick look at these nine factors that can stop you from getting approved.
1. A Poor Credit Score
All mortgage lenders will make an initial decision on whether or not you are loan ready by simply running a credit check.
Each lender has a minimum score requirement which will vary, but for the most part, it hoovers around 620 on average. (580 or FHA loans with 3.5% money down.)
Even if your credit score is 620, you aren’t guaranteed approval. And if you do get one, your interest rates will likely be through the roof.
Make sure you pay your bills on time each month and keep a close eye on your credit report to ensure there is no fraudulent activity going on or negative marks that can detour mortgage lenders from offering you a loan.
2. Negative Credit Report
Your credit report is a resource that lenders will always look at to see how financially responsible you are currently and how you have handled your business in the past.
If you have derogatory marks on your credit report, such as missed payments, late payments, bankruptcies, etc., your chance of obtaining a loan is minimal at best.
If you have a black mark on your credit report, you can contact the reporting entity and ask them to have it removed. You can also contact the credit agency themselves to discuss your options.
3. A Large Amount of Debt
Lenders love seeing a sizable income on mortgage loan applications. On the other hand, a large amount of debt that takes up a sizable portion of that income is no good.
If you are currently repaying other debts that limit the amount of cash available for future payments, you can get denied even if you have a good credit score.
Multiple credit cards with high balances or large loans with more than half the total balance remaining will not help you in your mortgage-seeking endeavors.
4. Employment History
Most lenders expect borrowers to have a good track record when it comes to employment. On average, you are required to have at least two years of consistent, steady employment on the books to qualify for a loan.
Note, if you have a large gap in your employment history due to difficult situations like a serious medical condition, you can often have it overlooked as long as you can provide proper documentation.
5. Annual Income
Along with steady employment and current debt, your annual income plays a huge role in your ability to obtain a mortgage. Lenders want to see that you have the funds needed to make your mortgage payments on time.
Most lenders look for a front-end ratio when approving mortgage applications. This means your payments, including taxes, insurance, principal, and interest, aren’t any higher than 28% (industry standard) of your income.
6. Not Enough for a Down Payment
Lenders today are getting home buyers approved with lower down payments than previously accepted. While the average amount down is 20%, making repayment options much easier, you can get by on only 3%.
Although that number seems quite low, 3% down on a $150,000 house is $4500. 20% down is 30,000.
No matter the requirements, if you can’t afford the down payment, closing cost, and other upfront charges, you won’t get approved.
7. Depts Obtained After Submitting Your Application
It is common for people to turn to credit cards after applying for a mortgage loan. It is a great way to pay for things without spending the cash you need to place the down payment on your house.
Unfortunately, something most people don’t know is that this can actually hurt your chances of being approved.
Lenders will pull your credit report during the application process, then again, before you close on the home. Never open up a new line of credit or make a large purchase until closing is final.
8. Damages or Issues with the Home
Many mortgage lenders are unwilling to offer a loan to anyone looking into a home with significant damage or other serious problems. (i.e., you foreclose on the house.) They don’t like to do this because it lowers their chances of recouping their money if they have to resell it in the future.
With that said, there are ways around this situation. You can try putting more money down at closing to lower the total due, or you can try to bring the seller’s price down, making it better match the appraisal price.
9. Missing Documentation
You have probably heard the words “document everything” at some point in your life. And that saying is for a good reason. Having the appropriate documentation can be a make or break when it comes to applying for a mortgage loan.
When prepping for your mortgage application, you must have documented proof for a list of information including.
- Mortgage application
- Certificate of eligibility for VA applications
- 2-3 months’ worth of bank statements for each applicant
- Credit report for each applicant
- Investment statements
- Large deposits
- Gift Statements
- Trust Income
- Court Orders or Judicial Decrease
If you are self-employed, you must provide your federal tax return from the last two years and a profit and loss statement for the year you apply.
There is a whole slew of things that can stand in the way of you and your dream home. Some can easily be fixed with a little work, while others will result in a firm “application denied.”
The best thing you can do when planning to purchase a new home is to keep the above factors in mind to ensure you aren’t hitting any unforeseen roadblocks in the end.
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