Inside Guide to Why Lenders Turn Down Mortgage Loans

Before issuing a mortgage loan, lenders check to see if you qualify. Qualification for a mortgage loan depends on several different factors: your debt-to-income ratio, your credit history, your gross monthly income, and your total savings/investments/earnings.

According to Bankrate.com, “About 30 percent of purchasers who apply for a mortgage are turned down.”

If you’re soon to be taking out a mortgage loan, this means that the home itself will be acting as collateral, but before the lender makes the decision to allow the home itself to stand in place of the value of the loan, you must first present evidence that shows you can manage the monthly payment amount and invest in the home responsibly.

Lenders are providing you with a way to cover the upfront cost of owning a home, but you must prove that you are worthy of the “advance” and will stick to the monthly payments. Not only do they check this information using a credit report, but lenders verify the information you have provided is accurate and up-to-date. For instance, a mortgage lender will physically pick up the phone and dial your work number to be certain you’ve been honest about your employment.

The total process of approval could take weeks, and even after you’re approved, a lender may still turn down your mortgage loan if any of your statuses change, especially credit, employment, and debt-to-income ratio.

Why Lenders Turn Down Your Mortgage Loan in the First Place

There are plenty of reasons you could get turned down for your mortgage loan. Obviously, the amount of your down payment will be a significant factor. The first reason you get turned down is the loan amount is out of your budget. You might say, “but.. I make this much!”, and quote a figure, however debts and credit history also play a huge role in whether or not your loan will be approved. The main things a lender is looking for are your debt history and assessing the potential risks of granting you the specified amount. A lender might turn down your mortgage loan application because it does not seem realistic that you will be able to make the payments.

Another way you may be denied a mortgage loan is if the loan amount is more than the home is actually worth. In this case, the loan amount is too high for the total worth of the home.

Lenders often give a vague description of why you may have been denied, so it’s important to ask as many questions as possible to learn how to improve the situation.

Getting Turned Down after Being Pre-Approved or Approved

It’s not uncommon for a mortgage lender to turn down a potential borrower for a loan. There are many potential reasons why a lender might turn down your mortgage loan, and one of the most common is your credit.

Before borrowing, it’s better for a homebuyer to improve and remedy issues pertaining to your credit report. This also presents a problem with the mortgage application, since if you go back and attempt to pay old debts, these may actually come back to hurt your credit report. This is because old debt is renewed each time you call collections, and this can create a significant problem when the debtor fails to remove evidence of making the final payment and zeroing the balance. For this reason, credit must be improved long before you decide to take out a loan. If you are denied a mortgage loan, then it might take time to improve your credit or pay off debts before a lender will approve your application.

Think you’re ready to start the application process and buy a home?

Bay National TItle Company offers you a team of experts who are dedicated to a better closing experience. Start working with us today by giving Bay Title a call to learn more about Same Day Closing Disclosures.

SOURCES:

When Does an Underwriter Turn Down a Loan?

Mortgage Application Denied? Don’t Despair