Qualifying for a mortgage should not be complicated, and there are numerous articles written about how to get approved. This week I want to cover a few reasons why a lender could decline a mortgage application. If only one of the below applies, it’s very likely you can still get a mortgage. However, when your financial profile fits under more than two of the categories below, it could be more challenging for you to obtain mortgage financing approval.
- Thin credit
A reliable indicator of a good solid credit score is two years history of reporting on at least two debts. If an individual is short on reporting accounts, some lenders may consider alternative documents to support positive repayment habits. Six months of cell phone payments, car insurance or utility payments could be requested to demonstrate credit. If unable to show any history of past debt repayment, you may have to provide a larger downpayment or be asked to bring on a strong co-signer.
- Poor repayment habits
If a borrower has weak repayment skills, the potential lender will be looking for strength in other areas of the application to confirm mortgage payments will be made in a timely manner. Dependable income source(s), a larger investment through increased downpayment, and/or a co-signer can all add strength to an application with a bruised credit component.
- Downpayment source
Lenders become a little wary of borrowers purchasing a home using a downpayment solely sourced from gifted or borrowed funds. The rationale behind it seems to be that it is easier to walk away from a property when there is no investment of personal cash into it. It’s not surprising when a lender requests a portion of the downpayment come from the borrowers own resources before an approval will be extended.
- Lack of supporting documents
Mortgage lenders must have sound lending practices and one way they do this is through the collection of documents proving a borrower adequately qualifies to successfully repay mortgage financing extended to them. If a borrower cannot provide paperwork confirming their financial picture that is acceptable to the lender, they are usually referred to an alternative or private lender that has fewer requirements.
- Borrowing too much
Too much mortgage is not a good thing. Lenders have preset qualifying guidelines which prevent lending borrower’s amounts where they can’t afford the payments. If attempting to borrow more than they can repay, a lender may request a larger downpayment to make the mortgage amount more manageable or decline the application for lack of affordability.
- They don’t like the property
Unique properties tend to create problems in the eyes of a lender as they are looking to lend on properties that appeal to larger demographics. Age restriction, partial commercial component, previous grow-ops, black mold and mobile homes are features that could prevent a property from getting the stamp of approval. If you’re interested in a property that does has some unique features, run it by some potential lenders before you submit an offer to ensure there are financing options available to you.
- They don’t like the location
A property located in an isolated area far away from a major city center can also present some financing challenges as not all lenders like all locations. If looking to buy in a remote area or community, ensure all other features of your mortgage application are strong.
Owning a home can be expensive, there are closing costs when you buy, potential repairs after you own and ongoing maintenance which keeps costing you money. As a result of this, lenders will be looking for a borrower to have the ability to cover these expenditures. If maxed out on all available credit lines and using up all savings for downpayment, the lender may be concerned about the lack of funds leftover after purchasing a home. Increase the likelihood for mortgage success by always keeping some money in a savings account, and make sure to avoid an unmanageable debt load.
- Lack of home equity
When purchasing a home to owner occupy, a minimum of 5% downpayment is required and 95% of the purchase price can be financed. However, if you are considering refinancing a property you already own, you can only borrow up 80% of the home value less any existing outstanding mortgage balances. Having said that, there are some private or alternate lenders who may lend you more than 80% of the current value though the interest rate will likely be higher and there could be upfront fees charged as well.
- Honesty is the best policy
Intentionally falsifying documents or application details will most often result in an immediate decline from the mortgage lender. Whether it’s at the beginning of the transaction, or days before closing when signing documents at the lawyer’s office, the lender has the right to withdraw their financing approval if any misrepresentation is discovered at any stage of the mortgage process.
It’s not difficult to get a mortgage if your financial profile fits into the right boxes as there is a combination of guidelines that must be met in order for a borrower to be eligible for a mortgage approval. Property, income, credit, net worth, and mortgage amount compared to home value, are just a few of the most important details considered when reviewing a potential mortgage application. Increase chances of an approval by being a low risk borrower with a strong financial profile. Working with an experienced mortgage professional who has access to multiple mortgage lender options also increases the likelihood of a positive response.