The first step to take when buying a house is to get a mortgage pre approval. Although it can be disappointing when your mortgage pre approval is denied, it doesn’t mean your hope of buying your dream house is dashed forever. Here are the top reasons why your mortgage pre approval may be denied and what to do to get the chances of getting approved in the near future.
What is mortgage pre approval?
A mortgage pre approval is a letter from a lender that states, based on your provided financial details if you will get a mortgage loan. How much you could be approved for will also be stated in the letter.
The process of mortgage pre approval is different from one lender to the other. Some basic details like your full name, annual income, and an estimate of your credit score may be required by some lenders while your finance’s full documentation and credit check may be required by others.
A mortgage pre approval is different from the mortgage approval, this is because pre approval is not a guarantee of getting funds. The pre approval letters are written to help you in the process of home buying, it gives you a budget you can start working with and guaranteeing the seller that you are fit to be financed.
Why You Might Not Be Getting Pre-approved for a Mortgage
Unless you are approved for a mortgage, the hope of getting your dream house may not come to reality. When lenders deny your mortgage pre approval, then it might be hard to buy that house you have really wished for.
Why Do Lenders Deny Mortgage pre approval?
Your application for a mortgage pre approval may be denied due to some reasons, but everything comes down to how risky it is to lend you money.
As stated by the Consumer Financial Protection Bureau’s (CFPB) analysis of 2019 mortgage-application denials, a high debt-to-income ratio was the most popular reason why mortgage applications are denied. The next two popular reasons were poor credit history and collateral. In summary, a total of 8.9% of mortgage pre approval applications were turned down in 2019.
Although the home mortgage disclosure act requires lenders to report why mortgage applications are turned down but it doesn’t require the same reporting for denied mortgage pre approvals.
When you as a prospective homebuyer understand why lenders reject mortgage pre approval letters, it can help you to determine what they are looking for.
Listed below are some of the reasons why your mortgage pre approval applications may be denied.
High debt to income ratio
Having a very low debt to income ratio can really speed things up. Your deb to income ratio shows what percentage of your monthly income is taken by debt. This inlucdes but is not limited to credit card bills, student loan payments, and your expected future mortgage bills. Almost 30% of the denied applications were due to high debt to ration income, as stated by the CFPB’s analysis of 2019.
Many of the lenders love to see a DTI of 43% or lower.
Poor credit history
Your poor credit history could also play a role in your pre approval denial. This is because when the lenders are evaluating your credit history, they typically look at how much you are using out of your credit limit, your payment habits, and the total number of loan and credit cards you have.
A high number of debts, late payments, and accounts in collection could also cause your denial. According to the CFPB analysis of 2019, almost 19% of denied applications were due to poor credit history.
Bad collateral or low home value
The collateral for your mortgage is your home. The lenders can foreclose your home and sell it, if you fail to repay your loan, to make up for their losses. Your application may be sometimes denied if the house isn’t valuable enough, especially when comparing it to how much you want to borrow for it.
Around 14% of the 2019 denied applications were due to insufficient collateral, as stated by the CFPB.
Mortgage lenders have tightened their lending standards due to the coronavirus pandemic. Many others have increased their down payments and credit score requirements, while others lowered their debt to income ratio requirements. Due to this, getting a mortgage pre approval in this environment may be hard.
What next if you are denied?
Ask your lender why your pre-approval application was denied. Knowing the reason for your denial may help you identify the issue quickly and find some ways to correct the issue.
What to do if you are denied
- Boost your credit score: Your credit score can be improved by paying your credit card balances, ettling the accounts in collections, deal with overdue payments, and let the credit bureaus know of any errors found on your credit report.
- Consistency is the key: Be consistent, make sure to pay your bills on time, always, and be sure you have a steady job. These can speed up your chances of getting approval.
- Reduce your debts: As your debt is going down, so also is your debt to income ratio (DTI). Aim to get at most 43% or lower.
- Add extra source of income: Additional sources of income will boost your earning, thereby helping to reduce your DTI. You can ask for a raise or take on a side gig, but lenders normally will take into consideration your past two years of income, when assessing your mortgage repayment ability.
It can also help to apply with several lenders. This is because requirement qualifications vary from one lender to the other, particularly during the covid-19 pandemic. So trying different lenders can give you the shot at getting approved.
When your mortgage pre approval is denied, it doesn’t mean your home buying journey has come to an end. Ask your lender why your application was denied, take measures to correct the issues, pull your credit report often to see how you are improving.
A credit or housing counselor can also be worked with. They can guide you towards taking the right steps for your credit and particular situation.