When you apply for mortgage loanthe last thing you want is for the lender to tell you that you are not approved.
Unfortunately, there are situations when mortgage lenders do not allow borrowers to obtain the loan they are interested in. Here are three common reasons why a mortgage application might be refused.
Start your path to financial success with a bang
Get free access to select products we use to help us meet our financial goals. These fully proven options can be the solution to help boost your credit score, invest more profitably, create an emergency fund, and more.
By submitting your email address, you agree that we will send you monetary tips along with products and services that we believe may be of interest to you. You can unsubscribe at any time. Please read our Privacy statement as well as Terms and Conditions…
1. Your income is unstable
When mortgage lender evaluates your loan application, their main purpose is to determine whether you will repay the loan on time. They look at many different financial factors to gauge your chances of default, but your income is one of the most important.
Lenders want to make sure that you have sufficient income and that it is relatively stable. After all, if there is reason to believe that you will end up making much less money while repaying your loan, then there is a good chance that your payments could be a problem.
In general, lenders want to see that you have worked in your current job (or at least worked in this field) for about two years and that your salary has remained largely stable (or increased) during that time.
Your mortgage may be denied if lenders see any of the following signs of instability:
- Difficult employment history
- Recent career change
- Freelance work with highly fluctuating income and inconsistent clients
2. You have too much debt
The amount of debt you already have is a big problem for creditors. Borrowing too much money can be a signal that you cannot afford a mortgage.
Lenders usually look at your debt-to-income ratio… It measures how much of your income goes towards paying off debt. Lenders look at this because they don’t want too much of your paycheck to go to the lenders.
If your debt, including the mortgage you are hoping to get, exceeds 43% to 46% of your income, you will likely have a hard time getting a loan approved.
3. Your credit score is too low.
Finally, lenders check your credit rating to get an idea of how responsible you have been in paying all your bills in the past.
IN the credit rating required for the mortgage differs depending on the type of mortgage. For many lenders ordinary loansif your score is below about 620, this is considered a sign that you are not going to pay securely on your mortgage. However, for others types of mortgagesfor example, government-backed loans, you can get approval with a score of only 500 points.
What if your mortgage loan is denied?
If you have been denied a mortgage loan, you have several options:
- Explore loan alternatives from different lenders: Eligibility requirements can vary from one lender to another. The fact that you were turned down by one does not mean that no one will give you a mortgage. Government-backed loans can be a particularly good option as eligibility requirements can be more relaxed. But beware subprime mortgages, which may be available to borrowers with bad credit history, but at a very high rate.
- Work to improve your financial reputation: You may strive to pay off a debt, increase your credit rating, or offer a higher down payment to reduce the perceived risk to lenders.
- Take less: If you are willing to take on a smaller loan, you will also reduce the risk for lenders and have a better chance of getting approved.
- Apply with the help of a specialist: If someone with a better credit history or more stable income will guarantee your loan, approval should be easier.
Denying a mortgage can be very frustrating, but don’t let this obstacle stop you from becoming a homeowner. Explore all the options for getting the mortgage loan that’s right for you.