If you’ve just been rejected for a mortgage, chances are good that you’re fuming. Answers from the lender might be shortcoming or vague at best. However, there are some common reasons that people get rejected for a mortgage.
Once you learn what they are, you’ll have a pretty good guess why you didn’t make the cut. Then you can set about doing everything in your power to make yourself more credit worthy.
This is the big one, the most common problem that keeps people from being able to buy their dream home. You just don’t have the income to make the payments. Two groups of people tend to fall into this pit more than others: Freelancers (whose income varies greatly and do not have a single employer) and people who have just changed careers (as their income is considered unreliable). Those with a spotty employment history can also be rejected because of income anxieties.
What To Do About It: Not much to do here but sit and wait. You’ll need two years of documented income from one field — preferably one employer — before most banks will give you a mortgage, especially in this credit market.
Not terribly surprising, but one of the most common reasons that people are rejected is that their credit just isn’t up to snuff. These days you need between a 620 and a 680 at the very least. A full third of all Americans won’t make the cut. There’s more to your credit than just your score, however. If you have a history of bankruptcy, short sales, late mortgage payments or foreclosures in the last two years, there’s a good chance that you’re going to get your application rejected. The problem might not even be that your credit is bad; You could just not have enough of a credit history.
What To Do About It: Pay your bills in full and on time. Resolve any outstanding credit issues, such as old delinquent accounts. Get a credit card and pay off the balance every month.
No “Compensating Factors”
“Compensating factors” is a mortgage industry euphemism for good bullet points on your credit that offset the bad points. For example, it’s OK to have a high debt-to-income ratio if you have some other selling point that sets that off.
What To Do About It: Get some compensating factors, or at least begin highlighting them to lenders. Examples of compensating factors include:
– A down payment over 20 percent of the mortgage
– A loan-to-value ratio of under 80 percent
– Cash reserves equaling 12 months
– A credit score of 740 or more
Any of these will help to offset any problems that you might have on your credit report card.
Your credit history and income might not be the problem at all. You might just have filled the application out wrong, or not given enough information. If you don’t include everything that the application requests — including personal, banking and employment information — you might be rejected out of hand for not filling the application out properly.
What To Do About It: Fill the application out completely and carefully. Have your spouse look over the application after you have filled it out to ensure that you’ve crossed all your “T”s and dotted all your “I”s. Then submit the application again.
Sometimes it’s not you — it’s the lender. If you have an inexperienced or inept loan officer, that can be the reason for your rejection. Some mortgage lenders just don’t have the experience and know how to make it work for you. Underwriting guidelines are always changing and unless the loan officer is abreast of these changes, you might get rejected through no fault of your own.
What To Do About It: Shop around for a more experienced loan officer. Be sure to be candid about your recent rejection.
Getting a Loan in Uncertain Times
The credit market has loosened a bit in recent months, but it’s still harder to get a home loan than it was before the financial crisis of ’08. One way to help yourself out? Know why you might be rejected and anticipate it. This puts you on much stronger footing when applying for a home loan.