Since the housing market crash more than 10 years ago, most lenders have been extra selective in approving home loan applications. From 2001 to 2007, mortgage debt in the United States grew almost two-fold, and the amount of housing debt per household surged by over 63% despite wages remained stagnant.
When the bubble burst, almost four million American families lost their houses to foreclosure. Although many markets have already recovered, some are still feeling the effects of the financial crisis today.
That is why you should not be surprised to learn that Chicago, Phoenix, and Salt Lake City mortgage lenders are more cautious. The financial industry does not want another bubble to form, and we do not need another generation of future homebuyers traumatized by such a devastating event.
If you think that you are ripe for home ownership, what are your chances of getting denied? Let us explore the likely reasons why a lender might turn your mortgage application down.
You Have an Unimpressive Credit Score
In 2017, more than 30% of home loan borrowers faced rejection by having less than perfect credit. Lenders do not necessarily shun Bad-credit individuals, but those with high-credit profiles are likely to get a yes more quickly, regardless of the type of mortgage they hope to qualify for.
Most lenders use FICO, so pay attention to this particular credit score before shopping around. Find out what the main credit bureaus, Equifax, Experian, and TransUnion, think about you three to six months before your first application. This way, you will have time to improve your creditworthiness accordingly.
You Have a Lot of Debt
Your debt-to-income (DTI) ratio reveals how much money you have left to pay for your mortgage after covering all of your other debts.
There are two DTI ratios: front-end and back-end. The former only takes into account your estimated mortgage payment while the latter includes it along with your other financial obligations. The maximum back-end DTI ratio most lenders want to see is 43%.
You Have Inadequate Income
A lender will judge your capacity to pay by your monthly income. The size of your income is evaluated alongside the quantity of your debt; hence, your DTI ratio will be scrutinized.
You Have Unreliable Employment
Your income is just as good as the steadiness of your job, so you still appear as a risky borrower if you are newly employed even if you make a ton of money. To convince your lender that you will not go jobless in the future, it helps to be in the same company for at least two years.
You Have Insufficient Cash
Prove your lender that you have the means to cover the upfront expenses attached to the transaction. Apart from the down payment, you ought to pay the closing costs, fees incurred during the process. You must also have cash reserves seasoned for a couple of months to show that you can stay liquid for an extended period.
It can be hard to qualify for a mortgage, but it is for the benefit of everyone. It will not be the end of the world if you get denied, but it should serve as a wake-up call that you can’t afford to buy a house yet or you are trying to get the wrong mortgage.