For many consumers, homeownership is still an important financial and life milestone. Buying a home, however, requires a great deal of capital. Most of us can’t pay for a home in cash. Instead, we have to borrow the money from a lender. A lender fronting the money for your purchase wants to make sure that you are likely to repay the loan. After all, if you default, it’s the lender that loses money.
If you have been rejected for a mortgage application, there is a good chance that there was a red flag indicating that you are a risk for default. Here are 4 reasons that your mortgage application might have been rejected:
1. You Have a Low Credit Score
One of the most important factors associated with your mortgage application is your credit score. Your credit score is a three-digit number that represents your level of responsibility with credit. Someone with a high credit score is considered responsible and capable when it comes to paying bills. If you have a history of making on-time loan payments, then the assumption is that you will continue to make these payments.
A low score, on the other hand, means that there is an increased risk that you will fall back into past patterns and end up defaulting on your loan. If your credit score is below 620, you will have a very hard time qualifying for a conventional loan. With a score of below 580, you might not even qualify for government-backed mortgage programs.
2. Your Down Payment is Too Small
When you apply for a mortgage, the lender wants to know how much money you are bringing to the table. Conventional wisdom says that an appropriate down payment is 20% of the purchase price. However, with home prices in the hundreds of thousands of dollars, a down payment that size can be difficult to come by.
Lenders might accept a down payment of 5% or 10% on your mortgage, as long as you are willing to pay for private mortgage insurance. Some government programs will allow a down payment of 3.5%, or even 0%, but you will have to pay an insurance cost with these programs as well.
Lenders willing to accept less than 5% down without government backing are few and far between since the financial crisis of 2008. While you can still find them, it’s difficult. If you don’t have an adequate down payment, your mortgage application will probably be rejected.
3. Short Work History
Since the lender relies on you to repay the huge amount of capital paid out for your home purchase, it’s important for you to have a steady income. When you apply for most mortgages, you need proof of income. Pay stubs, tax returns, and even income audits (especially for the self-employed) can be used to show that you have a regular income that is high enough and paid on a schedule that allows you to handle mortgage payments.
A short work history can be a red flag. If you don’t have at least 60 days’ worth of employment with the same company, it can be harder to get a loan. In some cases, lenders are also wary of applicants that have switched jobs numerous times within a couple of years. If it looks like your work situation isn’t going to be stable, your application might be rejected.
4. High Amounts of Other Debt
Even if you have a steady job, a 5% down payment, and a good enough credit score, your mortgage application might still be rejected if you have other debt in high amounts. Concerns that you will be overwhelmed by debt can lead to a rejected application.
Some lenders like to make sure that your total debt payments (your mortgage payment plus credit card, car loan, and other payments) each month won’t exceed 36% of your monthly income. If you have high amounts of other debt, there is always the worry that you will choose to make a credit card or car payment instead of a mortgage payment. And what happens if your hours are cut or you lose your job and you can’t handle everything?
Before you apply for a mortgage, you need to make sure your finances are in order that you are truly ready to buy a home.