Securing a mortgage isn’t always as easy as it might seem. In some cases, mortgages are rejected, and there can be quite a few different reasons. Understanding the most common reasons mortgage applications are denied will help you to avoid falling victim to them and potentially losing your dream home.
The Balance Between Debt and Income
According to HMDA, 31% of denied applications happen because of a poor debt-to-income ratio.
Debt-to-Income-Ratio (DTI), or how much money you make per year compared to how much debt you have, is one of the most important metrics when it comes to securing a home loan. A disproportionate ratio, with debt obligations consuming a large portion of income, signals financial strain and raises red flags about the applicant’s ability to take on a mortgage payment.
Industry standards generally favor a DTI ratio under 36%, a threshold that underscores the importance of minimizing debt before applying for a mortgage.
Not only does a lower DTI ratio improve the likelihood of approval, but it also leads to more favorable loan conditions, like interest rates and repayment terms.
The Role of Credit History
The second highest reason for denial is a poor credit history, which makes up 27.59% of denials.
If you’ve had a foreclosure, bankruptcy, or missed payments, it’s possible that this will cause some bumps in the road. Credit history is essentially a testament to a person’s financial reliability, with a particular focus on their ability to manage long-term financial commitments.
Fortunately, rebuilding credit is possible with some patience and discipline. On a similar note, during the mortgage application process, even applicants with good credit should avoid any large purchases that could alter their credit score, as this kind of action could undermine pre-approval statuses and jeopardize final loan approval.
Evaluating the Property’s Value and Suitability as Collateral
The third main reason for denials is insufficient collateral, which makes up 13.17% of denials.
Much to some people’s surprise, the property itself actually plays a large role in the mortgage approval process. Lenders assess the value and condition of the property to make sure that it serves as sufficient collateral for the loan. Two primary concerns arise in this context: the appraised value of the property relative to the loan amount, and the property’s condition and type.
Lenders adhere to specific loan-to-value (LTV) ratios, which dictate the maximum percentage of the property’s value they are willing to finance. If an appraisal reveals that the property’s value is below the expected amount, it can lead to a denial or a reduced loan offer. Properties that are deemed high-risk due to structural issues, or those with unique features that complicate financing, may also result in denial.
Contact Julie Krumholz from Superior National Bank
If you are not sure what your credit score is or you still have some questions regarding home loan eligibility, reach out to Julie Krumholz from Superior National Bank. Julie has been helping Michigan homebuyers for over 30 years and has several loan programs available for various incomes and financial situations.
Julie has worked in processing, closing and loan origination, underwriting, QC auditing and has even co-owned a mortgage brokerage firm. Her passion for helping homebuyers has made her a trusted resource for those navigating the homebuying process and beyond.
