It can be a devastating experience to be declined a mortgage for the home you thought you would be making your future in. If your mortgage application was denied, know that you aren’t alone. Nearly 11% of mortgage applications were denied in 2017, according to the latest available data from the Consumer Financial Protection Bureau (CFPB). Below are seven of the most common reasons your mortgage application might not be approved, according to the CFPB — and then how to move forward.
1. You have a history of late payments.
Before you can be approved for a mortgage, your lender needs to make sure you’d be able to repay the loan. Your income and how well you manage your existing debt help determine whether you’ll make your monthly payment but so will your payment history. Failing to pay your electric, internet or other recurring bills on time will eventually affect your credit reports and scores.
Your payment history makes up the largest chunk of your credit score and is listed on every debt-related account included on your credit report. Your credit score factors in the following details about late or missed payments, according to the FICO credit scoring system:
Other negative information such as a bankruptcy or an account in collections are also factored into your score and will catch your lender’s attention.
How to avoid this issue: Maintain a track record of on-time payments for all your existing debt before and after you apply for a mortgage. If you have a few late payments on your credit report, keep in mind the further removed you are from your late payments, the less impact they’ll have on your credit score.
Rapidly switching employers and being in-between jobs can be grounds for an application denial.
2. Your Job status has changed.
Mortgage lenders like to see evidence of steady employment, especially for the last two years. They’ll usually verify this by reviewing your pay stubs and W-2s. If your employment history is spotty and doesn’t demonstrate that you’ve been maintaining consistent employment, you’re considered a higher risk and likely won’t be approved.
How to avoid this issue: Limit your job changes before you apply for a mortgage. A good rule of thumb is have had no more than three employers in the last two years and no time between those jobs where you were unemployed. Additionally, avoid any job changes after applying for a mortgage, as this could derail the process.
3. Your bank account has some red flags
Lenders will request at least the last few months of statements from your banking institution to see how your finances are holding up. Because they’re closely reviewing those documents, any suspicious-looking activity will present some red flags. Suspicious activity might include, but isn’t limited to:
Combing through your financial profile is part of the mortgage lending process. If you frequently overdraft your checking account, that won’t reflect well on your reputation as a prospective borrower. On the other end of the spectrum, having large deposits that aren’t accounted for can also cause problems.
How to avoid this issue: Keep track of all your income-related documents and provide them to your lender when they’re requested.
4. You omitted Information on your application.
Don’t try to outsmart your mortgage lender by withholding information that is pertinent to your loan application, such as neglecting to mention alimony payments or an unpaid federal tax debt. And even if you do so unintentionally, it might be too late to correct it once it’s discovered.
Your loan officer should carefully review your application to make sure it’s filled out completely and accurately. A small error like missing a zero on your income or accidentally skipping a section could mean losing your dream home.
There’s also the chance you forgot to include information that the underwriter caught later in the more extensive screening process, such as money owed to the IRS.
How to avoid this issue: Disclose all of your debt, judgments and other financial-related details to your loan officer upfront. Otherwise, they may not be able to help you if it comes up and disqualifies you later on.
5. You recently opened a new credit account
A preapproval is conditional and based on where your credit reports, credit scores, income and overall financial picture stand at the time the preapproval was granted. Any changes you make to your finances can prevent you from buying a home.
How to avoid this issue: Don’t make any financial decisions that will result in an inquiry on your credit reports and an increase in your debt load. Practice this for 6-12 months before you start the homebuying process, McClary advised. You’ll also need to continue this practice until after you get your house keys. Additionally, try to find ways to boost your income to pay off debt.
6. Your Home appraisal doesn’t match up
Getting a full mortgage approval is also contingent upon having the home appraised. Any problems that come up during the appraisal process can stop you from getting your house keys.
A home appraisal is an unbiased estimate of a home’s value. Your mortgage lender will more than likely require an appraisal for the home you’re trying to buy in order to verify that the purchase price checks out. If the appraisal aligns with the sales price or is slightly higher, no worries there. But if the appraisal is lower than the sales price, your lender might deny your application.
How to avoid this issue: If you have the financial capacity to do so, you can make up the difference in cash. You could also try negotiating a lower sales price with the home seller.
The Bottom Line
Being denied for a mortgage can be a discouraging experience, but it doesn’t mean all hope is lost for your goal of homeownership.