Intro to Mortgages

Why was my Mortgage Application Denied?

It’s fairly common for home loan applications to be denied. According to the Federal Bureau of Consumer Financial Protection, 1 out of every 9 mortgage applications was denied during 2018. That’s a lot of denials. So let’s take a look at why so many would be home buyers are having trouble getting approved.

Examples of why your mortgage application was denied

Many think their credit score is the reason their mortgage was not approved, but this isn’t necessarily the case (although it could be), especially when there are loan programs that are specifically designed for lower credit scores.  But there are some things that you should absolutely stay clear of when applying for a mortgage. The truth is, your application can be rejected for any number of small reasons.

New Credit or other personal loans

If you’ve recently opened any new personal loans or taken on any additional credit while applying for a mortgage, chances are the application will be rejected. One of the biggest factors in deciding whether a lender will approve you for a loan is your debt-to-income ratio (DTI). This is calculated by dividing your total monthly debt, by your gross monthly income. Typically, lenders want borrowers to have a ratio less than 43%. A DTI higher than 43% would indicate that you do not have sufficient funds to pay off a mortgage.

Suspicious bank account activity

Most lenders will want to see a borrower’s recent bank statements to help determine if your finances are reliable. Any suspicious activity could be grounds for rejection. This might include:

  • Frequently changing addresses
  • Money transfers involving suspicious accounts
  • Multiple cash payments from suspicious sources
  • Frequent overdrafts on your account

Try to avoid situations that might cause a lender to become suspicious. This will help make the mortgage application process as smooth as possible.

Recent change in employment

Lenders want to see a stable source of income. That’s why most lenders check your employment history. If you have a tendency to jump from job to job, a lender will likely conclude that you do not have a stable income.

Undocumented gift money

It’s common for buyers to receive gift money when buying a home. But when this money is put toward a down payment, without any documentation of where the money came from, a lender might be hesitant. It’s a good idea to have those gifting you money to write a formal statement explaining where the money came from. Remember: a lender may need to approve money that is being gifted depending on which loan product a borrower is using.

Not enough money to close

Mortgages come with closing costs. If you don’t have enough extra cash to cover these additional expenses, then a lender may deny your application. To prove that you have the funds to close, a lender may request bank statements, or retirement account statements.

“My application was denied. Now what?”

Ask your loan officer why the mortgage was not approved. Then start to remedy the factors that are affecting your approval. If your DTI is too high, try and pay off some of that existing debt. If your credit score is too low, take some extra steps to fix it.

Reapplying for a loan

When you feel that all outstanding issues have been resolved, you can reapply for another mortgage. To help ensure that your application is approved, you may want to consider the following:

  • Making a higher down payment
  • Offering up some sort of collateral
  • Acquiring a co-signer

And don’t forget to shop around for different lenders. Just because one lender denied your application doesn’t mean another won’t approve it.