Top 3 Reasons Mortgage Applications are Denied
Buying a home is an exciting experience, but there is nothing more crushing to a prospective home buyer than having a mortgage application denied. To avoid unexpected bad news at the closing table, it is best to be prepared by meeting with a mortgage professional before starting your home search. Online resource, LendingTree, analyzed over ten million mortgage applications to compile this list for Forbes of the top three reasons home buyers get denied.
High Debt-to-Income Ratio
LendingTree reports 26% of rejections come from a high debt-to-income ratio or DTI. Lenders use DTI to make sure the borrower is capable of taking on additional debt and repaying it. Historically, most lenders are looking for a DTI of 45% or less. In some cases, a maximum DTI of 50% is also acceptable, based on new Fannie Mae requirements. However, these figures are averages and each financial scenario is different. Some lenders have become more stringent when examining DTI, especially following the Financial Crisis. To calculate your DTI, find out the total cost of your monthly debts and divide it by your monthly income.
Bad Credit History
Low credit scores and bad credit history account for 26% of mortgage loan denials. Many prospective home buyers monitor their credit scores through free credit report services online. These services are not always consistent with the widely accepted FICO score and may give consumers an inflated version of their actual score. To get a more realistic idea of your credit score before going into a home purchase, you can purchase your FICO score from myFICO for $59.85. The service also provides a free estimator to help determine what credit score factors need to improve to increase the score.
17% of mortgage application rejections are related to mortgage collateral or the value of the home versus the size of the loan. While the home buyer might be willing to pay $300,000 for the new home, the bank might not think the home is worth $300,000 and will not issue the loan. Getting an independent appraisal is one way to make sure you and the bank are on the same page before entering into a mortgage loan. The appraisal will ensure you as the buyer are not paying too much for the home and that the cost of the home is consistent with the loan the bank is willing to issue.
Buying a home should be an exciting experience. Partnering with a trusted mortgage professional is one of the ways to ensure the transaction goes smoothly, especially in today’s busy market. Reviewing your financial information and determining your buying power ahead of time is one to ensure there are no surprises after you start shopping.