Here Are the Common Reasons Why a Mortgage Pre-Approval Is Denied

A mortgage pre-approval is one of the most important steps in acquiring a mortgage. How do you ensure that your pre-approval gets through?

If you’re thinking of finally buying your first home, chances are you’ve scoured the internet for those “first-time homebuyer tips.” And maybe perhaps you’ve already encountered the proverbial advice to get pre-approved for a mortgage.

So now you find yourself preparing all the documents needed, checking your credit score, while comparing lenders and interest rates. You’re on the right track. In fact, getting a mortgage pre-approval is one of the most important steps in getting a home loan. It allows you to get a range of how much you will be able to afford with your current finances and saves you time shopping for a home.

Getting turned down on your application can be heartbreaking. It’s one of the biggest woes for most mortgage shoppers. So while you’re still on the early stage of preparing for your own pre-approval, it might help to learn from others’ mistakes.

Here are some of the most common reasons why home buyers are unable to qualify for a mortgage.

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Low Credit Score

A borrower’s credit score is the first thing that lenders look at when assessing their creditworthiness. Depending on the loan program, minimum credit requirements could vary but most conventional mortgage programs prefer borrowers with scores 620 and above.

Furthermore, the credit score will not only dictate whether you get pre-approved or not. It also determines your interest rate and how much mortgage insurance will be slapped into your loan.

Rates are sensitive to market pressures and can change frequently. Locking on a rate if projections point to a climbing trajectory is also one of the most tricky – and maybe costly – mortgage decisions.

Carrying a low credit can definitely reject your application. That is why it’s of primary importance that before you apply for a mortgage, you must check your record for any errors or inconsistencies.

Report disputes to the concerned parties.

Lack of Employment History

One of the primary requirements of qualifying for a mortgage is being able to establish your ability to repay the loan. That means you need to have a solid income source. This is often the reason why it’s hard for most self-employed and contractual job workers to qualify for one.

If you have no job or there are gaps in your employment history, your lender will hesitate lending you the money. And it makes sense. After all, where will you get the funds to repay what you owe?

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Not Enough Money

If you’re going to apply for a mortgage, you need to prepare enough money for a down payment.

One of the perpetuating misconceptions about qualifying for a mortgage is having to pay at least 20 percent of the home’s purchase price in down payment. That is no longer necessarily true today, though it still has its perks.

Paying for the conventional 20 percent down payment requirement gives you access to lower interest rates, allows you build equity faster, and saves you from paying mortgage insurance which could amount to 0.5 to 1 percent of the overall loan amount.

Still, having enough money saved for a down payment is not always a safe spot. Most conventional financing programs examine your financial reserves to ensure that you have enough money to back you up in case some emergency situation comes up. Some banks require their borrowers to have 6 months worth of mortgage payments stashed in their savings accounts, though not always a requirement.

If your current financial situation does not allow you to afford the hefty down payment, however, you can consider qualifying for a low down payment mortgage program.

High DTI Ratio

As part of the process of establishing your ability-to-repay, the lender looks into your DTI (debt-to-income) ratio. This figure tells the lender how much of your monthly income goes to paying your debt and if you still have some wiggle room left to pay for a home loan.

Having a high DTI ratio is ground for mortgage denial. Typically, lenders allow DTI ratio from 38 percent to 43 percent, though some mortgage programs allow higher limits.

Getting denied for a mortgage is not the end of the road. If you find yourself in this situation, the best course of action is to learn from your mistakes and use them to prepare better in the future.

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