Blog Posts October 12, 2011

Top 6 Reasons Mortgage Applications are Rejected

By Tara-Nicholle Nelson

Half of refinance applications are abandoned or  rejected, as are 30 percent of purchase mortgage applications, according to the  Mortgage Bankers Association. All told, the Federal Financial Institutions  Examination Council (FFIEC) says that well over 2 million mortgage applications  were rejected last year.

Want to avoid falling into that number? It’s  tough — especially in light of the fact that mortgage lenders have become  increasingly restrictive in terms of their lending guidelines since the housing  market crash.

Here, as a cautionary tale and primer on what to  expect, are the top six reasons mortgage lenders reject applications.

1. Income issues. Most failed applications falling into this category  have income too low for the mortgage amount they are seeking; often, a spouse’s  credit issues can create this problem, too, as the income the spouse plans to  actually chip in toward the mortgage cannot be considered by a lender.

But increasingly, the recent  vagaries of the job market are also causing this issue, as people who have  changed their line of work or have changed from salaried employee to freelancer  over the last couple of years can also have their home loan applications  rejected based on income.

2. Muddled money  matters. If the mortgage for which  you’re applying plus your monthly payments on credit card, car and student loan  debts will comprise more than 45 percent of your total income, you could have  problems qualifying for a home loan. You might also run into problems if you  rely too heavily on bonuses, overtime, cash wages or rental income — all of  these can be difficult or impossible to get a mortgage bank to consider, and if  they do, they might not take all of it into account.

3. Credit issues. Today, the mortgage-qualifying FICO score cutoff falls  somewhere between 620 and 660, depending on which lender and which loan type  you seek. More than one-third of Americans, by some numbers, have credit scores too low  to qualify for a home loan. Even if your credit score is high enough to  qualify, if you have any late mortgage payments, a short sale, a foreclosure or  a bankruptcy in the last two years, loan qualifying could be difficult to  impossible.

4. Property didn’t  appraise. Since the whole industry  had its hand (among other things) smacked for allowing home values to skyrocket  in a very short time, appraisal guidelines have tightened up — some would say,  even more than overall mortgage guidelines. So, it is increasingly common to  have the property appraise for a price lower than the sale price negotiated  between the buyer and seller.

This is especially common in the refinance  realm, as well over a quarter of U.S. homes are now upside-down,  meaning the mortgage balance owed is greater than the value of the home. (If  you’re trying to refinance an upside-down mortgage, consider the FHA  Short Refi program — contact your lender or get referrals to any mortgage  broker who makes FHA details to apply.)

5. Condition  problems. With all the distressed  properties on the market, and with most nondistressed sellers barely breaking  even, more home-sale transactions than ever are falling apart due to condition  problems with the property. Many lenders will not extend financing on homes  where the appraiser points out problems like cracked or broken windows, missing  kitchen appliances, electrical problems, or wood rot.

And in the world of condos and other units that  belong to a homeowners association, if more than 25 percent of units are rented  (rather than owner-occupied) or more than 15 percent are delinquent on their  HOA dues, new applications for refinance or purchase mortgages on units in the  development are likely to be rejected.

6. Technical  difficulties with application. The  days when lenders just took your word for it are long, long gone. Applications  with incomplete or unverifiable information are doomed.

If any of these mortgage loan application  glitches arise in your homebuying or refinancing process, it’s critical that  you connect with your mortgage professional, be it your banker or mortgage  broker, to determine what course of action to take.

In some cases, it might be as  simple as buying a stove you find at Craigslist and installing it before escrow  closes; but with income issues your mortgage pro will need to help you  determine whether it makes sense to pay some bills down, get a co-signer, or  even wait six months so your income documentation will qualify.