Why Your Mortgage Application Was Not Approved
Has your mortgage application been denied? It is no longer news that a large number of mortgage applications are being denied by banks every day. This has discouraged some people from trying again. At the same time, you can’t blame banks for declining some of the mortgage applications they receive. They are not established as non-profit organizations. They are out to make profits. The reason they decline some of the application for mortgage is because they want to be sure that they only release loans to people that they believe will be able to pay back. Therefore, if your mortgage application has been declined, you need to accept it in good faith. There is no sentiment about it at all. Instead of giving up on trying again, I will suggest that you first consider why banks usually decline some of the mortgage applications they receive. If you are aware of these facts, you will be able to know what to do before you apply the next time. This will increase the change that your application will be approved the next time. Below are some of the top reasons why mortgage applications are declined:
Inadequate Credit History: Top of the reasons why mortgage applications are denied is when applicants don’t have good credit history. Not only should you have good credit history, your credit history also needs to be long enough. Your credit history goes hand in hand with your credit score. If your credit score is bad, it is most likely that your mortgage application will be denied. Banks rely on credit score to measure the creditworthiness of respective mortgage applicants. Poor credit score means that you don’t have good credit rating. There is likelihood that somebody with poor credit score will not pay back his loans if he is granted mortgage. Also, it is not automatic that banks will approve your mortgage application if you have good credit score. One can build credit score by different means. For example, one can apply for secured credit card to build his credit. Banks will prefer somebody with good credit through the use of his regular credit card responsibly over a period of six years to another person that built his credit with secured credit card over twelve months period. So, before you apply for mortgage loan, you should ensure that you have enough good credit history. Your credit score should also be good enough. Before you apply for mortgage, you may need to apply for your free credit report so that you can check for possible errors. Eliminating errors from your credit report can increase your credit score with few points.
Read Also: How to Get Pre-approved For a Mortgage Loan
Insufficient Employment History: If you don’t have adequate employment history, your mortgage application may be rejected. Lenders want to ensure that you have stable job that can guarantee a good source of income for you. There is something you should understand here. It is possible that you have been on employment for ten years and your mortgage application is still denied. Why? If you have been jumping from one job to the other, that employment history may not can’t. Or if you have just changed the job from where you have been working for more than five year into a new one, you may need to give yourself some time before you attempt to apply for mortgage loan so that the application is not rejected. Another thing that lenders consider is, if you are changing from a salaried employment to a commission based employment, such employment may be looked at as being risky. While working on a commissioned based employment may not be a problem on its own, you are supposed to have been working on such job for like minimum of two years with the proof that you have been able to earn good commission consistently over the period.
Insufficient Income: Do you earn sufficient income that will ensure that you will be able to meet your monthly mortgage repayment obligations without defaulting? Your answer may be “Yes”. But lenders will look at your income in a different perspective. They will consider your current monthly expenses and other obligations you need to meet every month. If you have existing debts, taking new mortgage loan will definitely increase your monthly obligations. If the lender considers that the new mortgage loans might put too much pressure on your income, your application for mortgage loan will not be approved. A good way by which lenders measure the level of sufficiency of your income is by looking at your debt to Income ratio. If your debt to income ratio is considered too high, your application for mortgage will be denied. Also, it may even be true that you earn sufficient income but if you don’t keep proper record or documentation about the income, your income may still be termed insufficient. There is need for proper documentation of your income and you should be able to support it with tax returns.
Wrong Property: The type of property you want to buy may also contribute to the rejection of your mortgage loan application. Some lenders are biased towards particular type of property. For instance, if you are buying commercial property, the requirements may be more stringent. Besides, the value of the property you are buying may influence the decision of the lender whether they will accept your application for mortgage or not. Before you can be granted mortgage loan, the lender will first carry out the appraisal of the property concerned. The lender will like to be sure that the value of the property justifies the mortgage loan you are applying for. If the lender considers that the property is overvalued, it may not be good for use as collateral. One of the advantages of mortgage loan is that the property usually serves as collateral. If the value of the property cannot be sufficient to pay off the mortgage in case of default on the part of the borrower, then the purpose of using the property as collateral is defeated. For this reason, your application for mortgage may be denied except the amount of the mortgage loan is reduced to reflect the value of the property based on the appraisal carried out.
Low Down Payment: First timer homebuyers usually make one particular mistake. They don’t take the closing costs into consideration when planning to apply for mortgage loans. Closing costs have to be paid upfront. This usually reduces the amount of money left available to be made as down payment towards mortgage loans. If you can’t make sufficient down payment, your application for loan may be declined. Traditionally, lenders will expect that you make at least 20% down payment if you are applying for mortgage loan.
Too many applications: Some people don’t understand that every time they apply for a loan, the lender will put hard inquiry on their credit file. This is usually reported on consumer credit report. Apart from the fact that the lenders will see the number of times you have applied for credit which may make them believe that you are having problems with your finance, your credit score drops by few points each time hard inquiry is placed on your credit file. If your mortgage application is denied, you need to find out the reasons why it is rejected and ensure that you address the reasons before you make a fresh application.
Read Also: Why You May Need to Refinance Your Mortgage Loan
I believe that if you can take your time to address the issues raised in this article, you will increase your chance of getting your mortgage application approved.