Ten years after the financial crisis of 2008, we’re beginning to see lenders relax, and borrowers are having an easier time getting their mortgages approved. Still, millions of Americans submit mortgage applications which are denied. The following are leading reasons for mortgage applications being denied, and what you can do to prevent it from happening to you.
A high-debt-to-income ratio accounted for about 26% of all rejections, also called a DTI (Debt-to-Income), this ratio is a measure of your monthly payments as a percentage of your gross monthly income. For example, if you have a monthly gross income of $6,000 and monthly expenses of $2,000 you would have a DTI of 33% (= $2,000/ $6,000). To figure this ratio out for yourself, you’ll want to add up all your recurring monthly payments including your car payments, student loan payments, credit card payments, your new mortgage payment, and insurance.
Lenders are typically looking for applicants to have 45% DTI or less. There are ways to reduce your DTI but one of the first considerations you make will be buying a smaller home or waiting to buy so that you can save for a larger down payment which will, in turn, reduce your monthly mortgage payment.
Recently, Fannie Mae increased the maximum DTI to 50% for some borrowers. Borrowers should be cautious and learn from the mistakes of the 2008 financial crisis though; don’t sign on the dotted line just because a lender thinks you can pay. When 50% of your income goes to fixed monthly payments, you’ll have tough decisions to make later down the road if other variable expenses increase.
Lenders will be examining your credit history. Many times banks will user older versions of your FICO score. Free credit reports that you may be checking do not actually provide you with the specific information used by Freddie Mac and Fannie Mae; you’ll want to purchase the report from a source like myFICO to get this information. If you have a good score and you’re not worried about being close to the 45% line, then this is probably unnecessary.
If you’re willing to pay a high price for your home, but the bank does not agree with the value of the home, you’re not going to be able to get a loan. This accounts for about 17% of all mortgage application rejections Mortgage companies usually hire an appraiser to perform an independent appraisal. The appraiser will study recent sales in the area and of similar homes, examine the interior of the home.