Qualifying for a mortgage should not be too complicated and this week I want to cover a few reasons why a lender could decline a mortgage application. If only one of the below items applies, it’s very likely you can still get a mortgage, however, if your financial profile fits under more than two of the categories below, it could be more challenging for you. Be prepared by allowing plenty of time to seek financing when purchasing a home and setting the terms and timelines for condition waivers around obtaining a mortgage for the property.
- Thin credit
A reliable indicator of a good solid credit score is a minimum of two year’s 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 a credit history. 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 a weak repayment history, 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 past credit issues.
- Downpayment source
Sometimes lenders and/or the insurers are not comfortable with borrower’s purchasing a home with a downpayment solely sourced from gifted or borrowed funds. The rationale behind it is in the case of financial stress, 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 borrower’s own resources before an approval will be extended. This does not mean financing will be declined if a borrower does not have the downpayment from their own sources, though, the lender will be looking for strength in other parts of the application, such as a strong income source and credit history.
- 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 who has fewer requirements or their approved mortgage amount is scaled back to lower the risk for the mortgage lender.
- Borrowing too much
Too much mortgage is not a good thing. Lenders have preset qualifying guidelines that prevent lending borrowers an amount that is not affordable for them. If attempting to borrow more than they can repay, a lender may request a larger downpayment to make the mortgage amount more manageable or simply 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 restricted, a 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 are 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 centre 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 as there are closing costs when you buy, potential repairs after you own and ongoing maintenance which keeps costing you money. As a result, lenders will be looking for borrowers to have the ability to cover these expenditures. If you are 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 approval by always keeping some money in a savings account and ensure you manage a reasonable debt load for your level of income.
- 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 to a maximum 80% of the home value less any existing outstanding mortgage balances. Having said that, there are some private or alternative 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 by 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. There is a combination of guidelines that must be met in order for a borrower to be eligible for a mortgage approval such as and not limited to: income, credit, net worth and mortgage amount compared to home value. Increase your 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 could also increase the likelihood of a positive response.
Are you looking for mortgage information? Contact Jackie at 780.433.8412 or firstname.lastname@example.org. Stay in the loop by following on Twitter @Mortgagegirlca.