It’s never fun to be rejected in any situation, but it can be especially tough to deal with when you’re applying for a mortgage loan. You’ve had your heart set on buying a new home for quite some time and may not have expected a denial letter. There are various factors that go into the approval process for mortgage loans from credit score to job history and more. Here are 4 of the main causes for possible denial and how to avoid them.
- History of Late Payments
Lenders want to make sure you’ll be able to repay the loan before approving you for a mortgage. This is why payment history of other large bills such as electricity or car payments will help them determine whether you’ll be able to make timely mortgage payments every month. Payment history makes up the largest chunk of your credit score, and the FICO credit scoring system can give details on every debt-related account such as how late each payment was, how much you owe and how recently you were late. If your credit history is filled with late payments, the lender may lack confidence in your ability to maintain a mortgage loan. To avoid this, be on time for payments whenever possible.
- Change in Employment Status
Frequently switching jobs or being in-between jobs at the time of a loan application can yield a high chance of denial. Lenders prefer to see steady evidence of employment, especially within a 2 year period. They look at your pay stubs and W-2’s with your application and may consider you to be at higher risk if your employment records are spotty. Try to limit or avoid job changes before applying for your mortgage.
- Recently Opening a New Credit Account
You may be pre-approved conditionally based on credit reports and income, but that’s no grounds to open a new credit card or finance a vehicle right away. If this is done before the mortgage is officially approved, you may be self-sabotaging your chances at a loan. Opening any new line of credit affects your debt-to-income ratio, so don’t jeopardize your chances by making a spur-of-the-moment decision on something new.
- Not Enough Cash to Close
It’s important to take into consideration the down payment and closing costs for a new home. If you don’t have those amounts readily available or proof that you can pay them, your loan application could be rejected. These payments are a sort of “skin in the game” to let lenders know you are serious about a home and the costs it entails. Be sure to aggressively save for your mortgage costs and put as much down as you can.
While it is definitely discouraging to be denied for a mortgage loan, don’t lose all hope. Make sure you understand the reasons your application may have been denied and consult with the lender on how to make the necessary changes to have better luck the second time.