Since Home loan Repayment often takes many years. Mortgage lenders go through a rigorous screening process before granting their approval. This includes proving that you are a reliable borrower and earning enough income to make payments on time.
Whether you are a First time buyer or have been declined for a mortgage in the past, there are several red flags that can affect your application. Here are seven of the most common problems that can cause problems with your mortgage application, as well as tips to improve your chances of getting approval.
1. Have a bad credit score or no credit history at all
Applying for a loan with little or no credit rating is like applying for a job without a resume. Mortgage lenders need records showing that they can reliably make repayments and work on your debt.
In addition, a good credit score can increase your chances of getting approval as well cheap interest rates. According to the Home Mortgage Disclosure Act (HDMA) this accounts for around 22% of Home loan Applications are rejected due to poor credit ratings.
You should aim for a FICO credit score of 700 in order to get the best rates. If this isn’t realistic, try to get as close as you can by paying your bills on time and maintaining a low credit utilization.
You can also check your credit score by getting a copy of your credit report from the three major credit reporting agencies: TransUnion, Equifax, and Experian. According to federal law, you can submit a free application every 12 months.
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2. High debt ratio (DTI)
Your Debt-Income Ratio (DTI) refers to the percentage of your monthly pre-tax income that goes towards servicing your debt, such as: B. Credit cards, auto loans, mortgages, and student loans.
A DTI rate of 20% is considered low and is a good sign for lenders that you can pay responsibly. However, DTIs above 43% may ask them to request more evidence that you can repay the loan.
In fact, HMDA data shows that almost 80% of applications with DTIs above 60% are rejected.
Hence, you should keep your total debt down and postpone large purchases to use less credit. Use a loan calculator at least once a month to check your progress.
It also helps to learn about it different types of mortgages and guidelines from various lenders. You may find a loan option that better suits your financial situation.
3. Low down payment or high loan-to-value ratio (LTV)
The loan-to-value ratio (LTV) is the ratio between the loan amount and the value of the property. Lenders want to see low LTVs to know that their investment is protected in case of failure.
Saving for a larger down payment can increase your chances of approval, although it is still possible to secure a mortgage even if your LTV is greater than 80%.
In such cases, credit institutions require you to purchase mortgage insurance to protect their interests. Just keep in mind that in addition to your closing costs and monthly fees, you will pay an insurance fee.
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4. New loans and last minute purchases
Another common danger to avoid is making large purchases right after submitting your mortgage application.
For example, let’s say your current DTI rate is 42%, which is just below most lenders’ 43% limit. You will likely cross this threshold if you buy a new car with $ 500 monthly auto loan repayment – and this will likely result in your mortgage application being rejected.
The bottom line is that you should postpone large purchases and avoid other loans before your application is closed. Talk to a Mortgage professional before doing anything that violates your normal spending habits.
5. Substantial changes in your lifestyle
Lenders can also consider important life events, such as: B. starting a family or taking maternity leave at the time of your loan application.
They may become suspicious of your financial standing so they will likely need additional proof that you can make monthly payments without the hiccups.
Likewise if you are get divorcedyou need to reassess your financial standing – especially if you are buying a new property on your own. It can also increase your chances of properly handling joint loans that you previously took out with your ex-spouse.
6. Large bank deposits
Having a large amount of money deposited into your bank account is usually a cause for celebration – but not when you have an outstanding loan application.
A “large” deposit means an amount that does not meet the norm and is being credited to your savings or checking accounts. Your credit insurer may flag unusual deposits to confirm that you haven’t taken out new credit and that the money has come from acceptable sources.
For example, the deposit should not come from a party who can benefit from the transaction, such as a real estate agent or the home seller.
You will need to provide proper paperwork and receipts in case you received the money from selling your car or paying a personal loan.
You must also include all of your sources of income when applying for a loan so that unusual deposits can indicate that you have undocumented sources or side appearances.
Ultimately, it’s fine as long as you can prove the legitimacy of the deposit. The lender will not receive an IRS tax refund or regular salaries from your employer on your mortgage application.
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7. Incomplete documents and errors in your application
Your prospective lender wants to know the full history of your finances, so they will need a copy of your tax return for the past year or two. You can also ask for your latest pay slips and W-2.
You must provide all documentation requirements such as photo identification, credit reports, rental history, and bank statements. Most lenders will also request a written statement from you explaining any errors in your credit history.
Finally, review and review your mortgage application forms and requirements before submitting them. Misspellings, incorrect information and incomplete attachments can slow down the process or even lead to rejection.