You have filled out the mortgage application form and are eagerly waiting for the approval for your home loan. But afterward, you receive a rejection letter. This can be quite discouraging, especially when you have been trying hard to get your loan approved.
There could be several reasons why your mortgage application got rejected. Here are 10 common reasons:
Table of Contents
- 1. Low Credit Score
- 2. Your Address Is not Registered on the Electoral Roll or Voting
- 3. Too Much Debt
- 4. Your Income is Low
- 5. Debt-to-Income Ratio
- 6. Unstable Employment History
- 7. Insufficient Funds for Down Payment
- 8. Too Many Credit Applications
- 9. Unrealistic Property Value
- 10. You Don’t Match the Lender’s Other Conditions
- Final Thought
1. Low Credit Score
Your credit score is one of the key factors that decide whether you will get your mortgage loan approved or not. If your credit score isn’t up to the mark, then it is highly likely that your application will be declined. A good credit score indicates that you have a history of paying bills on time and making timely payments towards loans.
You may need a credit score of at least 620 to qualify for most mortgages. It is advisable to check your credit score and work on improving it, before applying for a loan.
2. Your Address Is not Registered on the Electoral Roll or Voting
Your name must be registered on the electoral roll at your current address in order to get a loan approved. The lender needs this information to confirm that you are who you say you are and where you live.
3. Too Much Debt
If you already have too much debt, then it is likely that your application will be declined. The lender will think why you need a loan again as you already have too much debt, which shows that you are financially irresponsible and incapable of managing your finances well.
To increase the chances of loan approval, try to pay off as much of your current debts before applying for a mortgage.
4. Your Income is Low
Mortgage lenders need assurance that you will be able to repay the loan on time. To assess this, they will evaluate your income and debt load. They’ll need income proof from you to demonstrate that you are capable of making timely payments towards the loan.
If your income is not sufficient to cover your current expenses plus the mortgage payment, then you may have trouble qualifying for the loan.
5. Debt-to-Income Ratio
Meanwhile, the lender will take into account your debt-to-income ratio (DTI) in addition to your income. DTI ratio is a personal finance measure that is calculated by dividing your total monthly debt payments by your gross monthly income. The monthly debt payments here include those for credit cards, auto loans, and other debts if you have them.
The likelihood of being denied a mortgage increases as this ratio rises. For better chances of getting the loan approved, try to keep it below 43%.
6. Unstable Employment History
Lenders need to be sure that you have a steady and reliable income. If your employment history shows frequent job changes or gaps in employment, then it is likely that your application will be rejected. To increase the chances of approval, try to maintain a stable employment record for at least a year before applying for the loan.
7. Insufficient Funds for Down Payment
Most mortgage lenders require you to pay a certain amount of money as a down payment before approving your loan. This is usually in the range of 3-20% of the total loan amount. If you don’t have sufficient funds for a down payment, then it will be difficult to get your application approved.
8. Too Many Credit Applications
Each time you submit a credit application, the lender will search your credit report, then the search credit report will be recorded. If you have too many credit applications on your report, then this may indicate that you are desperate for funds and thus the lender will be cautious of approving your application.
9. Unrealistic Property Value
Before allowing your mortgage application, the lender will also consider the potential value of the property you are looking to purchase. If they feel that it is overpriced or unrealistically priced, then they may reject your application as they won’t be getting enough money back in case of foreclosure.
10. You Don’t Match the Lender’s Other Conditions
Most lenders have other conditions (like age and employment status) that need to be met in order for you to qualify for the loan. If your application does not meet all of their criteria, then it is likely that they will reject your application. Be sure to check with the lender beforehand to make sure that you meet all of their requirements.
Final Thought
If your mortgage was declined, you need to ask the lender for a copy of their decision so you can understand why it was rejected. This will help you identify the issues that need to be addressed and work on resolving them before applying for another mortgage.
Understanding the most common reasons why your application was denied is crucial if you want to improve your chances of getting approved next time.
