Going through the mortgage loan application process is rigorous, and at times nerve-wracking. And to find out that, after all the scrutiny, your application gets denied, well – that can be heartbreaking. But you’re not alone – the most recent Home Mortgage Disclosure Act (HMDA) data indicates that 11 percent of home purchase applicants get denied. Here are the most common reasons, and some things you can do to turn the situation around.
Too much debt
Carrying too much debt is often a barrier for potential home buyers – and this includes all types of debt – credit cards, car loans, medical debt, student loans – all of it. If your debt-to-income ratio is greater than 40 percent, you will have a harder time qualifying for a mortgage loan.
What to do? Look at all your debts to see where you can reduce. It may take months, but not only will a lower debt-to-income ratio make it easier to qualify for a mortgage, it will make it easier for you to afford the payment. Here are four debt reduction strategies that may help.
You can also do things to increase your income – the second part of the debt-to-income equation. Get a second job. Ask for a raise. Work some overtime if you can get it.
Poor or no credit history
Credit score and history plays a big role in getting approved for a mortgage loan. A poor credit score is partially caused by making payments late or not paying debts, both of which will cause your credit score to suffer. If you have debts that were charged off and are in collection, your credit score will plummet. Bankruptcy and foreclosure are the probably the most harmful. Finally, paid and unpaid judgements are not good, as they signal that the courts had to be involved to get you to pay your debts.
Little or no credit will also cause your credit score to suffer. Some people avoid credit card usage because they are afraid of uncontrolled debt. However, not using credit at all will cause you to not have a credit score. After all, your credit score is partly determined by how you’ve handled credit in the past, and if you’ve never handled credit, the credit reporting agencies can’t guess how you will handle it in the future.
What to do? If your credit is poor due to a sketchy payment history, clean it up. Paying current debt on time. If you have any charged-off loans, pay them off. Often, time and good habits are the only way to improve your credit score. If you have no credit, get some. You may need to start with a secured loan or credit card, or have someone co-sign on a loan for you. Be sure to make your payments on time.
No or insufficient down payment
Coming up with enough money for a down payment on a home is challenging for many potential buyers. In addition to the down payment, many lenders require you to pay upfront closing costs like escrow deposit, appraisal, and title fees. Different mortgage loans have different down payment requirements. For example, conventional mortgages at White Sands FCU require a five percent down payment. A VA (Veterans Affairs) loan doesn’t require a down payment. An FHA (Federal Housing Administration) loan requires a 3.5 percent down payment. If you aren’t able to swing the down payment, you aren’t likely to be approved.
What to do? Start saving. Set up a budget and dedicate a certain percent of your pay to your “down-payment savings fund”. If you are a veteran, and qualify for a VA loan, you may be able to avoid the down payment requirement. Family members or friends can provide gifts that can be used as a down payment, however the lender may require documentation from the giver confirming it is not a loan.
Incomplete or inaccurate credit application
If, when you were filling out the mortgage application, you entered inaccurate information about your job status, income, credit history, address or anything else, this alone can lead to a rejection. If you omit information, the same applies.
What to do? Review the information on your application carefully for completeness and accuracy before you turn it in to the lender.
White Sands FCU has several mortgage options, some with financing up to 95% of the homes value. Our knowledgeable and friendly staff will help you during each step of the mortgage loan process, keeping your best interests in mind the entire time. There are also three Mortgage Rewards programs available, which you can learn more about at this link.