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Top Reasons Why Mortgage Loans Get Denied

Real estate agent holding keys and model house

Top Reasons Why Mortgage Loans Get Denied

Applying for a mortgage loan is one of the first steps in buying a home. While everyone hopes for a smooth process, the fact is that home loan denials do happen. In fact, there are many reasons why a lender may deny your loan. What’s most important is that you understand why the loan was denied so that you can quickly correct the problem.

Here are five of the top reasons why mortgage loans get denied.

1. Bad credit

Having a good credit score and sound credit history is a must when getting approved for a mortgage loan. While the average FICO credit score in the U.S. is 703, most Americans aren’t sure of where they stand credit-wise.

Missing payments, making late payments, and carrying too high of a debt load all impact your credit standing. If your loan was denied because of your credit score, the best thing you can do is work to rebuild your credit.

This means paying bills on time, paying down your debt, and refraining from opening any new lines of credit.

2. No credit

Having established credit shows that you’re a responsible borrower and can afford to pay off your debt. However, if you’re someone who mostly pays via cash, checks, or debit card, you may have little to no credit history.

If this situation applies to you, you may qualify for a mortgage loan based on a “non-traditional credit history.” Your lender will look at various sources, such as landlords and utility companies, to verify that you make payments on time.

Another option is to start using a credit card to slowly establish a credit history. But this option can take anywhere from six months to a year, so be mindful of when you’re looking to purchase a home.

3. High debt-to-income (DTI)

Lenders look at your monthly income in relation to your monthly debt to determine if and how much of a mortgage you can afford. As a rule of thumb, your mortgage payment should be less than 28% of your monthly gross income.

If your mortgage loan was denied due to a high debt-to-income ratio, start by paying off some of your debt. This will give your DTI a boost, as your debt load will be lower.

If you received a raise or promotion at work, let your lender know, as this will increase your chances of being approved for your loan.

4. Low appraisal

If a property appraises significantly lower than the purchase price, your mortgage loan is likely to be denied. This is because there is a set loan-to-value ratio that a property must meet before a lender can legally approve the mortgage loan.

Though not the easiest to work with, property valuation issues are sometimes resolvable. Try renegotiating the purchase price with the buyer. Or make a larger down payment, which means a smaller loan amount. 

5. Limited down payment and closing funds

Some buyers need to put down a certain amount of money at closing. These are funds that can’t be financed into the loan. If you’re unable to come up with a required down payment, chances are that your loan may be denied.

The good news is that you may be able to use a monetary gift from a relative to ensure that you have access to the right amount of funds. You can also ask the seller to pay closing costs, which means less money that you need to bring to the table.

The other option is to pause buying a home to give yourself time to save up money so that you’re better prepared in a few months.

The best options yet are when there are loan programs or incentives for which you qualify, which may require very little to no down (USDA, VA, and other incentive programs for certain professions like a teacher, first responder, etc.) Ask us - we can help determine if you qualify for any of these programs.

Want to learn more about buying a home? Interested in applying for a mortgage loan? Summit Funding Inc. is a lender that you can trust. Contact us today and let’s get you on the path to homeownership!

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