Underwriters are the gatekeepers to mortgage qualification. They check for documentation, ask questions about your income and spending habits, and make a decision to approve or deny a loan. If there’s an issue with your loan, then it’s up to you to dispute it or request a reconsideration. No two underwriters will look at a file the same way, so one underwriter might approve your loan while another denies it.
Mortgages are complex. Each case is unique, but there are common reasons for the denial. Unfortunately, not all of them can be avoided. These are the reasons mortgage loans get denied by underwriters:
Low Credit Score
A low credit score is not good as this shows you’re a high-risk investment and will have difficulty paying for the loan on time. It also indicates you have too many financial responsibilities.
It’s recommended you check your credit score first before you apply for a mortgage. If there are any errors, sort them out right away. You might also want to consider increasing your credit score a bit before you apply for a mortgage.
High Debt-To-Income (DTI) Ratio
Your DTI is a significant factor considered by lenders today. If it’s too high, that only means you won’t be able to afford your mortgage.
So, if you still have a lot of debt, you should work on paying them before you get a mortgage. Also, when you are already in the process of getting one, make sure not to add more debt by making unnecessary big purchases.
High Loan-To-Value (LTV) Ratio
Your LTV is the comparison between your mortgage balance and the home value. The LTV is reduced when you buy a house because of the down payment. That said, you really need to have upfront money ready for the down payment, which is why you need to take the time to save for a down payment.
Bigger down payment will show lenders you’re capable of saving. Additionally, you get better interest rates and explore more mortgage options for yourself.
Recent Change in Employment Status
One of the things lenders look into when screening loan applicants is their financial stability. Your employment is strong evidence of your financial stability. However, if you recently changed your employment status, perhaps a new job, you won’t be able to get approved immediately. This is because lenders know that a new job can come with so many uncertainties.
You can prevent this by staying at your current job until you get mortgage approval. On the other hand, if you are new to your job and your mortgage approval is in process, you can be transparent with your lender.
Unusual Bank Activity
Your lender will check if you have enough money in the bank to cover all the expenses involved in buying a home. If your lender sees unusual bank activity, such as big deposits from unknown resources, this can be a bad sign and make it look like you took out a loan to pay for a down payment that will impact your DTI.
Prepare for Your Mortgage
When taking out a mortgage loan, many things can cause it to get denied. An underwriter or loan officer will look over your financial information to make sure you are able to afford the home and won’t go overboard in debt after taking out the loan. Now that you know the common reasons for denial, you’ll be more prepared before applying for a mortgage loan.
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