Top 3 Reasons Mortgage Applications are Denied

The mortgage application process is a necessary part of home buying, and being prepared can make the difference between a rejection and an approval. Following the financial crisis of 2008, standards were tightened considerably. Recently, however, more applications seem to be opening up for hopeful house hunters. Conventional mortgages do have a higher approval rating than federal loans, nearly 4 percent, through Fannie Mae and Freddie Mac. Keep in mind that if you are denied a mortgage it does not mean that you need to call off the house search, but you do need to know the reason you were denied and take action to improve your scenario.

Top 3 Reasons for Being Denied a Mortgage

According to Forbes, the reasons for mortgages to be denied fall into three categories:

  1. Too much debt compared to income

Debt to income ratio is the number one reason applications are denied and accounts for about 26% of application rejections. Traditionally, lenders like to see a debt to income ratio of 45% or less when approving home loans, although some will accept a ratio of up to 50%.

Related Read: Matching Your Mortgage With Your Goals

  1. Problems with credit history, scores, and missed payments

Another 26% of applications are denied because of credit problems. Whether it be a low credit score, late or missed payments or insufficient credit history to justify a lender extending a large loan to you – having good credit is crucial for your chances of getting a home loan.

Related Read: How is Your Credit Score Calculated?

  1. Property Appraisal Issues

A mortgage banker is not likely to loan an amount of money that is higher than a property is appraised at. These issues account for 17% of loan rejections. Their valuation will be based on what an independent appraiser values the property at. Just because a home carries a certain price tag does not mean it is worth that much. This is not a protective measure for a lender but rather for their prospective client or buyer. As a buyer, you don’t want to pay more for a property than what it is worth because you may not be able to recoup your investment should you decide to sell.

Related Read: Basics on Debt and Mortgage Approvals

 

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