Mortgage application denied. These are not the three little words that you were hoping to hear.
You did everything that was asked and you followed the right procedures. You provided the mortgage adviser with every document that was requested – bank statements, job letter, pay slips, proof of address, lists of debts and assets, two forms of identification, names and contact information of three references, a letter of sale from the property vendor and all of the details about the property you were hoping to buy.
But somewhere along the line, something went wrong. Why was your mortgage application denied?
Why Was the Mortgage Application Denied?
If your mortgage application was denied, the first thing you should do is to find out the reasons behind the decision. If you know why you were denied, you can take the required steps to ensure that your next mortgage application will be approved.
Here are the top ten reasons why mortgage applications are denied:
One of the most popular reasons people are denied for a mortgage is as simple as not having enough income to qualify for mortgage. Lenders first assess what mortgage you can afford based on your income and then other factors listed below. If you are not earning enough based on the lender’s requirements for the type of mortgage that you want, your application will not be accepted.
High debt to income Ratio
Ideally, your debt to income ratio should not exceed 40% (can be more or less depending on your location). This means that your expenses (including the prospective mortgage payment) should not be more than 40% of your income. If you have several loans and they are already make up 40%, your chances of getting approved for a mortgage are slim.
Poor credit history
Your credit history is a critical indicator of how well you pay your bills. Incidents such as missed payments or defaulting on loans are signs that you are struggling to pay your bills. Financial institutions do not usually take risks on potential clients who have a poor credit history, because it signals that you might not make your mortgage payments.
Your details can not be verified
If you provide information to your financial institution, they will verify it using their own methods. If they can not verify information such as your loan commitments, names and addresses or contacts or any other information that you provided as part of your application, chances are that your application will not be approved.
Inadequate employment history
Lenders are very wary about lending to people who have an inadequate employment history. If you have had many jobs for short periods of time or there are long gaps between jobs, you may not qualify for a mortgage. Some financial institutions even stipulate that you must be employed in a specific position for at least two years!
Insufficient funds for the down payment
Many mortgage companies require a down payment which can range from 5% -25% of the purchase price of the property. This means that you should have this money readily available whenever you are ready to sign off on the mortgage papers. If you cannot provide strong evidence that you have these funds, your mortgage application will be denied.
Unfavourable property valuation
As part of the mortgage process, your desired property has to be valued. An independent valuer assesses the property and provides an appraisal of what the property is worth. The property valuation usually consists of an assessment of the building structure, the exterior grounds, access, location and planning and zoning restrictions. If the assessed value is more than the mortgage amount, then you should be good. But if the assessed value is considerably less than the sale price, your application may be denied.
Problems with the property
Purchasing a property is a multi-part process in which some of the parts take place behind the scenes. The attorneys (yours and the financial institution’s) conduct legal searches on the property to ensure that there are no ownership issues, liens, lawsuits or anything that could impact the institution or you as a result of the sale. If any discrepancies are found, the mortgage will be denied.
Self-employed with no strong business records
If you are self-employed, it will be harder to convince the lender that you are capable of paying a mortgage. In addition to the required mortgage documents noted earlier, self-employed persons must provide financial statements (balance sheets, income statements etc.), business records (e.g. tax returns) for their business and proof of future work. Failure to provide these may lead to a mortgage application denial.
Not many people understand that a simple error on the mortgage application form could lead to the application being denied. Additionally, if the lender or any of its agents make errors during the process, you might pay the price and have your application refused. Some common errors which can stop your mortgage from getting approved include name misspellings and incorrect addresses.
How to Get Your Next Mortgage Application Approved
Having your mortgage application denied is not the end of all things being. To get your mortgage application approved the second time around you must make every effort to fix the problems that are within your control. After you get over the frustration and disappointment of the rejection, it is time to take steps in preparation for the next attempt. The top ten ways to get a mortgage application approved are to:
Choose a Different Lender
Different types of financial institutions may have different requirements and levels of priorities for mortgages. Shopping around gives you the opportunity to see what the various lenders are offering, their borrowing criteria and requirements.
Boost Your Monthly Income
If your income is not enough to cover the mortgage, a second job or side hustle might be in order. A second job will put additional pressure on your time and in some cases, your health. If a second job is not possible, you might have to look for a lesser priced property or save towards a higher down payment.
Reduce Current Debt and Refuse New Debt
Paying down your debt can be a great help for your second attempt if you have had your mortgage application denied. Your debt to income ratio becomes smaller and your ability to qualify for the mortgage improves. Additionally, you should not take on any additional debt in any form (e.g. credit cards, line of credit, loans etc.)
Improve Your Credit Health
To improve your credit health, you must avoid taking on new debt and focus on reducing the debt you have effectively. You should always pay your bills and pay them on-time. Another tip is to get rid of credit lines that you do not use. If you have credit cards that you rarely use, absolutely consider paying off the outstanding balances and closing them.
Provide Accurate Information
Do not lie on your mortgage application. Always provide factual information about yourself. Because there are records about your financial past, you really cannot (and should not) hide important details from your lender.
Save towards a down payment
Bearing in mind that most mortgages require a down payment, you must have this cash available. If your target property is $100,000, be prepared to pay at least $5,000 as a down payment to the property. In addition to saving towards a down-payment, save towards the legal fees.
Do Not Change Jobs
If you have plans of applying for a mortgage, ideally you should not change jobs. Try to stay in your job until after you have received the mortgage approval. Although some lenders are more relaxed with this condition, you should not take the risk of this being the reason to have a mortgage application denied.
Choose the right property
Was your mortgage application denied because of problems with the property? When selecting a property, be very careful about which one you choose using specific characteristics. Carefully consider the location, the price, re-sale value, and the overall condition of the property.
Keep your Business Records in Check
As a self-employed person, you have to keep your records up to date and organised. Being self-employed means that your level of planning has to be a lot more detailed and well thought out. You might also have to get rid of a few expenses and build up quite a bit of savings before you apply for a mortgage.
Check and Double Check
Whilst you may not be able to control administration errors on the bank’s end, you can can control errors on your end. In your mortgage application, check that the form is filled out correctly and look for spelling errors in names or addresses. Some banks may offer an interview to discuss the application – use this as an opportunity to check for errors on the bank’s end.
Sometimes you might be able to meet all of these criteria and still get denied. The best thing to do is to have a conversation with your mortgage advisor and ask for a detailed break down of what the bank is looking for in its mortgage candidates. If you can present as much information as possible to the lender, you may be able to get a pre-approved mortgage or a mortgage certificate which states what you qualify for.
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