Is it possible to have a mortgage application rejected? Sure it is, but that doesn’t mean you can’t apply again or do some research to find out why it has been rejected. A well trained loan officer will take the time to explain exactly was your application was denied and will walk you through the necessary steps to get you on the road to homeownership. By law, you have the right to request why your loan application is not subject to approval. In many cases, it just takes some leg work to improve your credit or clear any discrepancies in the application.
A reason a lender or mortgage broker might reject your mortgage application could be due to the loan-to-value (LTV) ratio. This is just a simple way to tell you that the home you wish to purchase was appraised at a lower value than the amount you’re applying for. For those who apply for a maximum mortgage amount (generally 90-96.5% of the purchase price), a low appraisal could make you fail the LTV test as the loan is too large.
The solution may be as simple as ordering a new appraisal, or possibly your agent mistakenly underestimated the value? There could be a number of issues that may arise to cause you to fail the LTV test. A realtor who is familiar with the area in which you wish to purchase should easily be able to determine the reason why, especially if it was mistake on the appraiser’s behalf and new one needs to be ordered. Be aware that appraisal rules and regulations have become very stringent over the last six years.
Low Credit Score
One of most common reasons a borrower is denied for a mortgage is due to their credit score. No matter which lender you choose to apply with, all lenders have tightened up their lending requirements these past few years to help avoid another subprime mortgage crisis. Lenders require a good credit score and you must show the ability to pay other debts on time as well. These days, borrowers typically need a credit score of at least 580-620, even when applying for an FHA loan.
Before applying for a mortgage, it’s always crucial to first check your credit report to ensure there are no discrepancies that need to be corrected. Don’t just check one credit bureau, recent reports from the FTC show that 1 in every 4 consumers had errors on their credit report that can prevent future financing. It’s very important to dispute any inaccuracies found on your credit report immediately to the appropriate bureau.
Income and Down Payment
Another major reason people are denied on their mortgage application is due to insufficient income or funds available. Even though it may be difficult to hear that you don’t have enough income to qualify for the mortgage you wish to obtain, the lender may be doing you a favor by helping you avoid future default on the loan. This will only cause other financial burdens and you want to make sure you are buying a home that is priced right for your financial needs.
When determining your eligibility and ability to repay the amount requested, mortgage lenders will review your monthly income and compare it to the proposed loan payments and other debts you’ve acquired. In general, lenders will not want your mortgage payment to exceed about 28-38 percent of your gross monthly income. These ratios may be higher for FHA loans and are only guidelines.
Another reason for denial could be a lack of funds as most borrowers will need about 3-20 percent of the purchase price (depending on the loan type and amount) as a down payment. These funds will generally come out of pocket and if you don’t have the needed down payment for a property, a nice savings plan or gift from a relative may do the trick. Keep in mind that some states and lenders have special programs designed to help potential buyers, especially “first-time homebuyers.”
Please feel free to contact us at (800) 841-5494 or fill out the brief form here and we’ll strive to help you get a loan as quick and easy as possible!