You’re ready to buy a home and are applying for a mortgage, but have heard the crushing stories of mortgage denials that stretch out the time until you’re in your dream home. Sound familiar? Getting approved for a mortgage can be daunting, but it’s a major step in becoming a homeowner. Many times, this situation can be avoided and caught far before you are applying for a mortgage. Below, we break down the top reasons for mortgage denials and what you can do to prevent them.
Before we get started, let’s get some definitions out of the way. A mortgage is a loan that you take out when purchasing a home. A mortgage is secured by the home you are buying (meaning if you don’t pay off the loan, the lender can take the home back to make back the money you didn’t repay). The vast majority of home purchases have a mortgage because it allows you to buy a home with a small percentage of the home price (sometimes as little as 0%!). Because they tend to be quite large loans, the list of conditions you have to meet from lenders is very long, so there are a lot of reasons they can deny your application. Let’s find out the top reasons why applications are denied, and how to avoid them. Things might get technical, but don’t worry, we’re going to break it down for you.
Too High Debt-to-Income - 36.2% of denials
Your debt-to-income ratio, or DTI, is the percentage of your monthly income that goes toward paying down debts. For example, if you make $1,000 a month and your only debt is a $100 a month car payment, your DTI is 100/1000 = 10%. While seemingly simple, there are dozens of rules on how to calculate a debt-to-income ratio. It depends on the type of debt, how long you have it, and many other factors. Lenders require you to have a DTI under a certain percentage, which also varies based upon the lender, your finances, the loan type you are applying for, and if you qualify for any special loan programs. Because these rules are so complex it can be exceptionally difficult to figure out if your debt is under the bar ahead of time.
Credit History — 34.2% of denials
We have made it to the ever so intimidating credit score. Most people know that you need a good credit score to secure a mortgage, but credit issues still cause more than a third of denials! For mortgages, it’s not just the score that matters, but what is in your credit report. Having a credit score below 580 can make it very difficult to get a mortgage. Even if you have a 700 credit score, you can still get denied for mortgage-specific credit problems. Issues like having too many late payments on credit cards, a bankruptcy discharged too recently, or collections from government agencies like the IRS matter when applying for a mortgage. Finding and fixing these issues before applying for a mortgage is critical and difficult to do as they are frequently much harder to detect than a low credit score. Nevertheless, a low credit score can also cause you to get denied for a mortgage, so make sure to monitor your credit!
Collateral — 13.9%
As we talked about at the top of this post, lenders want to be sure they can make their money back if you don’t pay the loan, so they take the home you are buying as collateral. However, lenders know that home prices can fluctuate — sometimes by a lot — so they take steps to ensure that if they have to sell your home, they won’t lose money. Lenders do this by ensuring the home you are buying is worth as much as you are paying (this process is called an “appraisal” — figuring out how much the house is worth). They often ask you to put some of your own money into the home too, usually called a down payment. When you are buying a home and don’t have enough for the down payment, or the home’s appraisal comes back with a smaller number, this can result in your mortgage application being denied. Ensuring you have the right amount saved is key to avoiding this type of denial, as is making sure you have accurate information on the home you are looking to purchase.
Insufficient cash — 8.6%
The lender wants that you have enough cash to cover your down payment, closing costs, and other fees associated with buying a home. If you don’t have enough cash to cover these fees or your cash can’t be used (there are many rules around what kind of money can and can’t be used for buying a home), your application can be denied. Knowing exactly how much to save for all of these different costs is important. So important that it causes almost 10% of all mortgage denials!
Incomplete application — 8.5%
Believe it or not, around 8.5% of all mortgage applications get rejected because they are incomplete. That’s an easy fix! It is imperative to take time and complete the application properly to increase your chances of being accepted. Make sure to review your application upon completing it.
These are just a few of the reasons a mortgage denial might happen. As you can see, it can be overwhelming to take on all of these issues yourself and try to screen for them. That’s where Quo comes in: Quo automatically finds all of these issues for you, applying mortgage guidelines for dozens of loan programs against your finances to catch these issues early and show you what you should do to fix them. Plus, Quo will show you when you are ready to move forward and can help you close on your new home quickly with our team of mortgage experts, all in one place. Download Quo to see how close you are to owning a home.