Mortgage loans have become a necessity for many Americans in recent years, however, not everyone has access to obtaining a loan to purchase a home.
According to mortgage data from the Consumer Financial Protection Bureau (CFPB), at least 16% of loan applications were denied in 2020.
Therefore, it is important to know the factors and steps necessary to avoid being denied a mortgage loan.
Insufficient credit score
Not having the minimum credit score is one of the important factors for mortgage loan approval, although the credit score varies among the issuer’s economic policies.
According to an Experian credit report, a minimum FICO score of 620 is generally required to qualify for a conventional mortgage loan, or a Department of Veterans Affairs loan (VA loans).
The Department of Agriculture loans are for people buying property in rural areas, and require a minimum credit score of 640.
Federal Reserve data indicates that the average score for people applying for a mortgage loan is at least 786.
For people with low credit scores, the federal government supports a type of loan also called FHA loans, although they require high down payments.
No credit history
Another important factor is credit history, which involves having credit cards and personal loans, so lenders can review your payment history.
In the absence of credit history it is very likely that they will deny the loan because of the risk involved in approving it, so if you are going to apply for a loan, it is advisable that you build a credit history.
High income/debt ratio
It is common for lenders to check the ability to repay the mortgage loan according to the income-to-debt ratio, this allows them to review how much percentage of the income that goes to pay the financial commitments.
According to the Experian report, if your mortgage payments represent 28% of your monthly income, it is likely that the mortgage will be denied.
Low down payment capacity
The lender may not be convinced of your ability or commitment to repay your mortgage debt if you offer a very low down payment.
The higher the down payment, the more likely the mortgage will be approved.
Recent job change
If you recently got a job, you are likely to be denied a mortgage loan, as it is common for job stability to be considered an important factor in loan approval.
However, it is not a completely explicit requirement, although lenders mostly approve loans to people who have had the same job for at least two years, according to Rocket Mortgage.
Some reasons why you might be denied a mortgage loan
Even if you have a good income and solid credit, if all the financial information is not included on your loan application, you’re likely to be denied. Review your application carefully before submitting it.
If the home you want is a bad investment or needs a lot of repairs, it could cause lenders to deny the loan.
It is important to maintain solid banking records and not have any unusual transactions (such as large deposits) because lenders will review your transactions.