The Most Common Reasons For Declining A Mortgage Application
For many, taking out a mortgage is a monumental step in life. It marks the transition from renter to homeowner. Unfortunately, not everyone receives approval, and they’re often left unclear of why they were declined.
When an application is rejected, the lender doesn’t always divulge why, leaving borrowers looking for answers. Below is a list of the most common reasons a lender may reject a home loan application.
Keep reading to also learn if it’s possible to apply for a mortgage loan with bad credit.
1. Bad Credit History
Your credit report is made up of various factors, all of which are used to determine your creditworthiness. A high debt-to-income ratio, missed payments, and past defaults or bankruptcies are all issues that could cause an application to be rejected. A mortgage declined due to late payments is also a real possibility.
When you first contact a mortgage broker or lender, they’re likely to give you an agreement in principle. This states how much it’s willing to lend you based on a preliminary look at your report and financials. Once a house has been decided upon and you’ve applied for a home loan, the lender will conduct an in-depth look at your financial record. Should they find something they don’t like, they could very well deny your application.
In some cases, an applicant may be denied outright as a result of their FICO score. In this instance, the borrower has two options: improve their rating or apply for a mortgage loan meant for people with poor credit.
However, all applicants should be aware of the dangers of taking out a mortgage with bad credit.
2. No Secure Source Of Income Or Recently Changed Job
Mortgage loans are a long-term commitment. Thus, a lender will be wary of any application from a borrower who doesn’t have a secure income source. To further add to this point, lending companies don’t like to see an applicant change jobs during the applying process. The only exception to this would be if it’s to get a better paying job.
If you’re self-employed, it’s advised to hold off any changes to your company's structure until after the financing has been granted. For example, changing from a sole proprietorship to an LLC.
3. You Don't Have A Sizeable Deposit
As a show of good faith, all traditional mortgages and bad credit home loans will require the borrower to make a down payment. A large down payment will typically result in a lower interest rate and make the loan less expensive in the long term. Typically, a down payment of 20% is advised. However, fewer and fewer people are finding themselves unable to save this amount of money.
As a result, down payments as low as 5% are becoming more common, even on low credit mortgages. These lending products may require the borrower to take out private mortgage insurance. Keep in mind that any amount less than 5% could result in the lender not wanting to grant you the loan.
4. You Lied Or Concealed Information On Your Application
Fundamentally, a loan is based on trust. If the lender feels they can’t trust you, they’re unlikely to lend you money.
For example, home loan applications start by finding out if an individual has had any recent financial issues, such as loan defaults, credit settlements, or bankruptcies. In fear of being denied outright, some choose to lie and say no, when in fact, they’ve had these struggles.
This might work out at first, and the borrower may still receive an agreement in principle. However, once the lending company looks deeper into the individual's credit history and finds out they lied, they’re unlikely to approve the application.
It’s essential to understand that lying on an application is never a good idea, as the lie will be discovered eventually. If you think you won't qualify for a loan because of your poor financial history, it may be worth noting that alternative mortgages for people with bad credit do exist. For instance, Homebridge supplies government home loans for poor credit borrowers.
For more information about Homebridge's bad credit mortgage plans, click here.
5. The Property You're Buying Is Hard To Properly Value
The mortgage application process takes much longer to complete than a standard unsecured loan. Even after a lender has approved your application for the desired amount, it’ll still do some due diligence on its behalf.
The first step involves sending a surveyor to make a valuation of the property. Just because a home is listed for a specific price doesn’t mean it’s worth this amount. From the bank's perspective, until the debt is paid off in full, it still has an equity stake in any house it grants a loan for. Therefore, the institution doesn’t want to overpay.
In some cases, a home may be difficult to properly value. This can be due to various factors, such as building design and material, bylaw/zoning issues, future construction plans in the area, and so forth.
If the bank feels a property's value is too difficult to estimate with a high degree of accuracy, it’ll likely deny the loan application.
6. The Lender Thinks You Won't Be Able To Make The Payments
How much you can borrow isn’t based solely on your credit score. How much you earn and the size of your current debts is also taken into account. If your monthly income is too low or your current monthly debt obligations are too high, the lender may have concerns about your ability to make your mortgage payments consistently. As a result, it’ll deny your application.