8 Reasons Mortgage Loans Are Denied Under Underwriting
Here are several common reasons why insurers refuse loans and how you can help prevent them from happening.
1. Your credit score is too low
A low credit rating may indicate that you are a high risk investment that may have difficulty making payments on time or meeting financial responsibilities for the loan.
Before you apply for a mortgage, take a look at your credit score and your credit report. Make sure to dispute any errors. If your credit score is low, you may want to try increasing it before you apply. If you have a qualifying credit score, make sure that you don’t do anything during the mortgage process to bring it down, like missing a payment or maxing out a credit card.
You can get your free VantageScore® 3.0 credit score and report courtesy of Rocket Homes® as well as tips on how to improve your credit based on your report.2.3
2. Your Debt-to-Income Ratio (DTI) is Too High
Your DTI ratio helps lenders determine if you will be able to take on more debt. If your DTI is high, you may not be able to pay your mortgage. Most lenders require a DTI of less than 50%. For the most possible loan options, it’s a good idea to keep the DTI at or below 43%
If you have a lot of debt, you should work on paying it off before you apply for a mortgage. And once you’re in the process of getting one, don’t add up debt by making big purchases unrelated to your purchase of the house itself. By eliminating some of your debt, you’ll increase your cash flow and prove to a potential lender that you have enough money to pay off a mortgage.
3. The loan-to-value ratio (LTV) is too high
LTV compares your mortgage balance to the value of the house. When buying a home, your LTV is reduced by your down payment. Some loans require specific down payments and LTVs. For example, a conventional loan requires a minimum down payment of 3% or 97% LTV. If you can’t pay the minimum down payment, you won’t be able to get the loan.
To avoid this problem, take the time to save for a advance payment at least 3% to 3.5% depending on your loan. Not only will a larger down payment help you get better interest rates and more mortgage product options, it will also show lenders that you can save money. For people who are self-employed or have other negative circumstances, a large down payment can overcome the worries of a nervous lender.
You can also inquire down payment assistance programs if you need more help.
4. Your employment status has recently changed
Lenders like to see financial stability. When you receive a regular salary, you are more inclined to make your monthly payment. If you’ve lost your job recently, a lender may be wondering if you can afford a mortgage right now. And a new job can come with a lot of uncertainty. You might hate it and quit. You could get fired. Or maybe you accepted a job with a lower salary, which can also affect your loan approval.
If you leave a job in the same field and with equal or higher pay, this usually won’t be a problem. If not, you can prevent this from being a problem by staying in your current job until you close, or by waiting to apply for a mortgage until you’ve been in your new job for at least. at least a few months. If you can’t do either and you want to get a mortgage with a new job, just make sure you are transparent with your lender and communicate with them about this change. You can also provide additional documents to help you, including your letter of offer and employment verification (VOE) from your employer.
5. You have unusual activity on your bank account
As mentioned above, there are many costs to buying a home that you have to pay in addition to the mortgage, including closing costs, insurance premiums, taxes and owners association fees. In many cases, your lender will want to make sure that you have enough money in the bank to cover these expenses for up to 6 months. However, large deposits – especially from unknown sources – can trigger red flags. These could indicate that you have taken out a loan to pay a down payment, which will be added to your DTI.
If you receive a large amount of money as a gift, you can give a gift letter from the donor explaining that the money was a gift and does not need to be refunded.
6. There are issues with the property
The results of an inspection can also make or break your chances of getting a loan. For example, if you get an FHA loan, the house must meet certain guidelines to be eligible for the loan. If the property fails, your FHA loan will be denied. If a appraisal inspection discovers a major problem, such as a bad foundation, the loan may be refused because the house would be considered a bad investment.
To prevent this from happening, be sure to walk around the house in person and read the housing information carefully. Make sure you get the home inspected early to avoid wasting time.
7. You have a history of missed mortgage payments
If you’ve been a homeowner before, your insurer will want to see proof that you’ve paid off your mortgage consistently and on time, otherwise they might not think it’s worth the risk to approve your loan for that new home.
8. The rating is too low
A lender cannot lend more than the appraised value of the house. If the expertise value cost less than the sale price, you will either have to pay the difference out of pocket or renegotiate at a lower price. If you cannot do either, your loan will be refused.