Whether we work with customers directly or whether it is a brokerage referring a client that got rejected; one common complaint we hear is the difficulty they had with their previous mortgage loan application. These are not people with multiple foreclosures in their past, or people who have had a hard time maintaining an income. Instead, these are hardworking honest people with hefty down payments or with a lot of equity in their properties accumulated over many years. These are also people who have made some decisions that negatively impact the application. Take a look at this list and see if one or more of them has (or could) cause your mortgage application to fail.
1. Frequent Employment Changes
The banks love to see applicants who have worked at least two years with the same employer. There are other factors that can cause them to overlook this, such as your credit score or borrowing history. However, if you draw income on the basis of commission, most traditional lenders will require that you have at least a two-year work history at that company, particularly if your down payment is less than 20 percent.
2. Lack of Established Credit
It is one thing to have a high credit score, but if you’ve never carried an installment loan, then a bank may not be willing to approve you for a home mortgage. The change in loan size does mean that you are taking on a lot more credit, and the lender may force you to find someone to co-sign or guarantee the mortgage loan. Exceptions are possible if the down payment will be more than 20 percent.
3. Bad Debt Recently Cleared
You would think that settling old debt would help your credit score. Ironically, it reduces it, because it means that those accounts as new activity. Some creditors will agree to remove the debt from your credit report if you pay in full, but if they will not agree to do that, paying the debt can actually hurt your case.
4. Property Appraisal Does Not Match Your Estimated Value
Let’s say you agree to buy a house for $600,000. You will put down $120,000, or 20 percent, and the lender has approved you to borrow 80 percent of the purchase price, which would be $480,000. However, let’s say that the appraisal comes back at $560,000, and the lender decides to approve 80 percent of the appraised value, which would be $448,000. Now, with your down payment, you would only have $568,000 — $32,000 less than the agreed purchase price. So you can either come up with the difference or negotiate a drop in price with the seller – or end up having to walk away.
5. Closing a Credit Card You Never Use
Credit cards with zero balances actually help you, because credit utilization is a metric that makes up part of your credit score. So if you have $40,000 in available credit from cards, and you currently owe $8,000 on them, but then you close some unused cards that total $30,000 in available credit, you still owe $8,000, but now you are using 80 percent of your available credit instead of 20 percent – which can torch your credit score. So if you want to close one of these cards, do not do it while you are waiting for mortgage approval.
6. Recent Automotive Lease or Purchase
Do not ask for any other credit inquiries while you are waiting for mortgage approval. Traditional lenders have debt-to-income ratio requirements, and if you add a car payment to your debt level, that could drive the ratio below what the banks will accept. If you absolutely have to buy or lease a vehicle during this time period, talk to the loan officer first to get those ratios checked.
7. No Confirmation for Property Down Payment
Banks and credit unions always want to see where your down payment came from, so they will ask for 90 days’ worth of bank statements. If they see a large deposit during that window, they will ask what the source was. Gifts from family members are acceptable, so long as you have a letter showing that you will not have to pay it back. The bank or credit union might also want to see the relative’s bank statements, so ensure you can provide a paper trail for the money.
8. Lender Refuses to Accept the Property
There are some lenders that will not lend for properties in certain areas. Your home inspection could come back with a legion of issues to fix. Some properties come back with such environmental issues as asbestos, vermiculite, illegal duplexes or triplexes, 60-amp electrical services, improper plumbing, other wiring issues, mold, or even marijuana growing operations. If MLS identifies the property as a “handyman special” or if the property is on Crown land or a leasehold, the bank could have problems. These are factors for you to use as you search for property, ruling out ones that could cause issues with approval.
9. Dishonesty in Communication with the Lender
It is a tempting idea to boost your income on your application, or to omit a credit card that you owe. If your lender finds out, then, everything slows down, because the underwriter has to go back and check everything from the beginning. If you commit mortgage fraud, you can end up going to prison. It is not worth it.
10. Excess Write-Offs or Deductions for Self-Employed Borrowers
Many people go into business for themselves because of the opportunities to write off expenses and bring their taxable income down. If you do too much of this, your reported income (which is what the bank uses to determine your debt-to-income ratio) could be too low to qualify for your mortgage. One way around this is to boost the down payment to 25 percent or higher, but just make sure to watch those numbers as you add deductions.
11. Last-Minute Changes in Your Credit Score
After the initial credit check, the bank or credit union will almost always run another one just before final approval, to make sure that you have not done anything to alter your debt-to-income ratio. That sort of mistake can leave you without funding for the house you want to buy, and cost you your earnest money.
Have you found yourselves in one of these situations? Get in touch with Amansad Financial as we can overcome many of these issues quickly and with little to no stress.