3 Common Reasons for Mortgage Denials

Could you be at risk of being denied a mortgage loan?

When you apply for a mortgage loan, the last thing you want is to end up with the lender telling you that you aren't approved.

Unfortunately, there are situations where mortgage lenders don't allow borrowers to get the loan they're interested in. Here are three common reasons why a mortgage application can be denied.

1. Your income is unstable

When a mortgage lender evaluates your application to borrow, their main goal is to determine if you're likely to repay your loan on time. They look at many different financial factors to assess the chances you'll default, but your income is one of the most important.

Lenders want to make sure you have enough income and that it's relatively stable. After all, if there's reason to believe that you'll end up making much less money during the time you're repaying your loan, then there's a good chance making your payments could become a problem.

In general, lenders want to see that you have been at your current job (or at least worked in your current field) for around two years and that your salary has remained largely steady (or gone up) during that time.

Your mortgage could be denied if lenders see any of the following signs of instability:

• A rocky employment history
• Recent career change
• Freelance work with wildly fluctuating income and inconsistent clients

2. You have too much debt

The amount of debt you already have is also a big concern for lenders. If you've borrowed too much money, that can raise a red flag suggesting you may be unable to afford a mortgage.

Lenders typically look at your debt-to-income ratio. This measures how much of your income goes to paying down debt. Lenders look at this because they don't want too much of your paycheck committed to paying creditors.

If your debt, including the mortgage you hope to take out, exceeds around 43% to 46% of your income, you are probably going to have a hard time getting approved for a loan.

3. Your credit score is too low

Finally, lenders review your credit score to get an indication of how responsible you've been with paying all of your bills off in the past.

The credit score needed for a mortgage is different depending on the type of mortgage. For many lenders of conventional loans, if your score is below around 620, this is seen as a sign that you aren't going to pay your mortgage reliably. However, for other mortgage types, such as government-backed loans, you may be able to get approved with a score as low as 500.

What can you do if you're facing a mortgage loan denial?

If you've been denied a mortgage loan, you have a few different options:

• Explore loan alternatives with different lenders: Qualifying requirements can vary from one lender to another. Just because you've been turned down by one doesn't mean no one will give you a mortgage. Government-backed loans can be an especially good option, as qualifying requirements may be more relaxed. But watch out for subprime mortgage loans, which could be available to bad-credit borrowers but at a very high rate.
• Work on improving your financial credentials: You could aim to pay down debt, increase your credit score, or come up with a larger down payment so you reduce the perceived risk to lenders.
• Borrow less: If you're willing to take on a smaller loan, then you also reduce the risk to lenders and could stand a better chance of getting approved.
• Apply with a cosigner: If someone with better credit or more stable income will guarantee your loan, approval should be easier.

Mortgage loan denials can be very upsetting, but don't let this roadblock prevent you from becoming a homeowner. Explore all your options for getting a mortgage loan that's right for you.