Getting a mortgage is never a sure thing, even if you’re the richest individual in the world. And even if you have a perfect 850 FICO score.
There are a ton of underwriting guidelines that must be met to qualify for a home loan, both for the borrower and the property. So even the most creditworthy borrower could still run into roadblocks along the way.
Last week, the Federal Financial Institutions Examination Council (FFIEC) released Home Mortgage Disclosure Act (HMDA) data for 2012.
Though mortgage lending was up a big 38% from 2011, there will still thousands of declined mortgage applications.
In fact, the top mortgage lender in the United States, Wells Fargo, denied 84,687 of the 399,911 home purchase applications it received (21.2% rejection rate), including those that were pre-approved, according to a Marketwatch analysis.
Rejection Rates by Top 10 Mortgage Lenders in 2012 (Purchases)
Reasons Why Lenders Decline Mortgage Applications
- Inadequate credit history
- Lack of affordability due to limited income
- Insufficient job history
- Lack of funds for down payment, closing costs, and reserves
- Issues with the property (as opposed to the borrower)
While the possibilities are endless, I can provide several reasons why a mortgage loan might be declined.
Let’s start with credit, which is a biggie. First off, if your credit score isn’t above a certain level, your home loan application might be declined.
Even if you credit score is above a key threshold, a lack of credit history could prevent you from obtaining a mortgage. What this means is that those who didn’t open enough credit cards and other loans (student loans, auto loans/leases, etc.) prior to applying for a mortgage could be denied.
Seems unfair to be punished for not using credit, but mortgage lenders need to measure your creditworthiness somehow, and without prior datapoints it can be difficult to impossible to do so.
Staying in the credit realm, what’s on your credit report could hurt you as well. If you have recent mortgage lates, you could be denied for a subsequent mortgage.
The same goes for past short sales, foreclosures, bankruptcies, and so on, though the FHA has recently eased guidelines on that front.
Another credit issue that comes up is when borrowers make the mistake of opening new credit cards or other loans during or just before the mortgage approval process.
Doing so can hurt your credit score and/or increase your total monthly liabilities, which could kill your application in the affordability department.
Affordability and Income
Speaking of affordability, if you don’t make enough money for the mortgage you’re trying to qualify for, you could be denied. Banks have certain DTI ratio maximums that are enforced, and if you exceed them, you’ll be declined.
So attempting to borrow more than you can afford can easily lead to a denied app.
Where that income comes from is important as well. If you’ve only been at the same job for a few months, or less than two years, you’ll have some explaining to do.
Underwriters want to know that your income is steady and expected to be maintained in the future. If you just started a new job, who knows if you’ll last.
The same is true about sharp fluctuations in income – if your income all of a sudden shoots up, the underwriter might not be convinced that you’ll continue to make that amount of money until it’s proven for at least a couple years.
There’s also the odd chance that mortgage rates jump and if you don’t lock in your rate, you could fall out of affordability.
Assets and Down Payment
Another common problem is coming up with the necessary funds to close your loan. Generally, you need both down payment money and reserves for a certain number of months to show lenders you can actually pay your mortgage.
If you aren’t able to come up with the money, you could be denied, especially if there are certain LTV limits that must be met.
And if you try to game the system by depositing money from family or friends in your own account at the last minute, you’ll likely be asked to document that money or risk denial.
As I noted earlier, it’s not just about you. If the property doesn’t appraise, the loan will be put into jeopardy. If it comes in short, you’ll need to bring more money in at closing, and if you don’t have the money, you might need to walk away.
There are also those who try to convince lenders that a property will be a primary residence, when in fact it’s a second home or an investment property. This is a common red flag that often leads to a denial.
For condo or townhouse buyers, there are additional hurdles that involve the HOA and the composition of other owners in the complex. If too many units are non-owner occupied, or the HOA’s finances are in bad shape, your mortgage could be declined.
Even if it’s a single-family home, if there’s something funky going on, like bars on the windows or some kind of weird home-based business, financing might not happen.
There’s also good old-fashioned lying and fraud – if you attempt to pump up your income or job title, and it turns out to be bogus, your application will get declined in a hurry.
If you are denied, it’s not the end of the world. Simply determine what went wrong and look into applying with a different bank, perhaps one with more liberal guidelines. Or ask for an exception.
Of course, you might just need to wait a while if it’s a more serious issue that can only be cured with time, which is certainly sometimes the case.
Condensed List of Reasons Why Mortgages Get Denied
1. Loan amount too big
2. Income too low
3. Inability to document income
4. Using rental income to qualify
5. DTI ratio exceeded
6. Mortgage rates rise and push payments too high
7. Payment shock
8. LTV too high
9. Inability to obtain secondary financing
10. Underwater on mortgage
11. Not enough assets
12. Unable to verify assets
13. No job
14. Job history too limited
15. Changed jobs recently
16. Self-employment issues
17. Using business funds to qualify
18. Limited credit history
19. Credit score too low
20. Spouse’s credit score too low
21. Past delinquencies
22. Past foreclosure, short sale, BK
23. Too much debt
24. Undisclosed liabilities
25. New or closed credit accounts
26. New/changed bank account
27. Credit errors
28. Unpaid tax liens
29. Unpaid alimony or child support
30. Divorce issues
31. No rental history
33. Undisclosed relationships with seller (non arms-length transaction)
34. Attempting to buy multiple properties
35. Property doesn’t appraise at value
36. Defects with property
37. Home business on property
38. Non-permitted work
39. HOA issues
40. Investor concentration in complex too high
41. One entity owns too many units in complex
42. Title issues
43. Lender overlays
44. You own too many properties
45. Co-signer for other loans
46. Property not really owner-occupied
47. Layered risk (lots of questionable things added up)
48. Incomplete application
49. Inability to verify key information
50. Plain old mistakes