For first-time homebuyers, the process of getting a mortgage can be daunting.
The worst part is the lingering feeling you get when you're waiting to learn whether you've been approved. Even if you pick a good lender and gather all the necessary documents, it still may not be enough.
With this in mind, I asked a handful of highly recommended mortgage brokers to share the five most common reasons mortgage applications get denied. While some of the reasons won't come as a surprise, others are less obvious and may very well save you from making a critical mistake.
1. Poor or no credit history
This is far and away the most common reason mortgages are denied.
"Today's mortgage market is pressured by secondary markets, and regulators who have become overwhelmingly specific on scores," Gus Floropoulos of New York's Quontic Bank told me. "If your credit score is below a specific threshold, you will not obtain the loan."
What affects a credit score? "Inability to demonstrate positive repayment on other debts, late payments, past bankruptcy, and past foreclosure can all affect your score," said James Adair of PDX Home Loan in Portland, Ore.
Does this mean you're simply out of luck if your score falls below the requisite threshold?
Not necessarily, says Matt Hodges of Presidential Mortgage Group in Charlottesville, Va. "I recently had a closing occur, on time, with a client who had a 619 middle credit score. While it fell below our conventional and FHA guidelines, I was able to improve the client's credit score with some pay-downs of debt prior to closing."
But one thing to keep in mind is that your credit score isn't just checked at the beginning of the process; it's reaccessed throughout.
It's for this reason that Bob Van Gilder of Finance One Mortgage urges homebuyers to avoid buying big-ticket items like a car or furniture on credit in the time period between submitting your mortgage application and closing on a house: "Credit is checked during the process, and loans are audited by the lender before closing. If new payments show up, those payments may kick it into the 'decline' bucket."
2. Exhausted debt-to-income ratio
The second most cited reason mortgage applications are denied is that the prospective borrowers already have too much debt relative to their income.
"This simply means that you don't make enough money to borrow what you're asking for," Adair says.
The problem, according to Floropoulos, is that "people either are buying something they cannot afford, or don't show enough on paper even if they can afford it. It's a combination of lack of income and overextended existing personal household debt."
So how much is too much? "The agencies have targets of allowable debt-to-income. For Fannie Mae and Freddie Mac, that is 45% to 50% debt load based on gross monthly income. For FHA, the total debt load can reach 56.99%," Hodges says.
3. Not enough "qualifying income"
In the world of mortgage finance, not all income is created equal. More specifically, the only type that counts toward your debt-to-income ratio is "qualifying income."
"This is a huge area where borrowers can get surprised by how much less they qualify for than expected," Adair told me. "Lots of people make money, but it can't all be counted toward 'qualifying' for one reason or another -- unreported cash income, commissions or bonuses without a two-year history, certain kinds of self-employment income that is tax sheltered, etc."
With this in mind, it's important to keep track of where your income comes from. "Bank guidelines now require any large, non-paycheck deposits (typically over $500) to be sourced, with a paper trail (invoices, supporting bank statements, etc.) and explanation letter," noted Dakota Gale of Green Mortgage Northwest in Portland, Ore.
"This can be a huge amount of work for you as the client, and can potentially delay your loan," Dakota continued. "Before you deposit that 1099 contractor check, or a gift from Mom, ask your loan officer what the best way to proceed is!"
Along these same lines, most brokers I spoke with emphasized the importance of communication. "The more that's disclosed at the beginning of the process, the easier it is to avoid specific problems that may arise," Floropoulos says.
4. Too much "layered risk"
This was a point Hodges made that I found particularly insightful. While the mortgage approval process is largely quantitative and objective, there is nevertheless a qualitative and subjective piece to it.
"Even if the automated underwriting engine -- either Fannie's delegated underwriter or Freddie's loan prospector -- gives you an 'accept' or 'approve' finding, an underwriter can still downgrade that decision based on multiple negative factors," Hodges says.
The things that would cause an underwriter to do so include "payment shock (much higher mortgage than rent payment), short period on a job, self-employment, limited credit history, funds for closing coming as a gift rather than being saved, and/or limited reserves post-close."
5. Changing your horse midstream
Growing up in an agricultural community, one of the things you learn is that, for obvious reasons, you never want to change your horse midstream. It turns out that the same can be said of the mortgage application process.
The fewer things that change between when you apply for a mortgage and close on a house, the better. While I've already noted that this applies to making big-ticket purchases on credit in the intervening time period, it applies to other things as well.
One example Van Gilder gave was losing or changing your job. Another involved changing the terms of your loan: "Say the original contract called for a 20% down payment, but then the borrower decides to keep more assets liquid to pay for incidentals (a fridge, new counters, etc.). If they were tight to qualify in the first place, then the additional mortgage insurance could cause their debt ratios to exceed the allowable limit."
Keep these things in mind
Applying for a loan isn't anybody's idea of a good time. However, if you take advice like this into consideration, you can make it less of a burden than it otherwise would be.