The search for a perfect home sometimes pales compared with meeting the requirements for a mortgage. Lending underwriters pay special attention to your credit history in making loans. Loan underwriters base the final lending decision on your "creditworthiness." This term defines your ability to repay the loan. While some lenders overlook minor credit dings, others turn down loans for the same borrower. Most lenders agree, however, on a group of key standards when denying loans.
Income and Employment Changes
Lenders require stable income to qualify for a loan. Losing your job is an obvious reason for loan denial, but other job changes can also cost you your mortgage. Changing jobs, even in a lateral move or an advancement, means the income documentation collected for the lender no longer is accurate. If you have a salary reduction, lose a second job or experience a drastic cut in sales commissions, your loan is at risk for a denial.
Credit History Problems
Underwriters look for a history showing you use credit wisely and take care of your bills and debts in a timely manner. Lenders refuse loans to potential borrowers with credit dings. Damaged credit includes a history of late payments and unpaid loans. Credit applications showing bankruptcies create underwriting problems. Admitting to a bankruptcy during the application, however, might mean you still have a chance at the loan -- provided you're paying off your creditors under the bankruptcy agreement. If your lender turns you down, you are legally entitled to a free credit report and your credit score.
Misrepresentation and Fabrication
Misrepresentation, a polite term for lying on your loan application, ends any loan consideration. If lenders find a false statement, the underwriter wonders about other potential fabrications on your application. You may also be charged under federal and state laws for making false statements under the oath signed on the loan application. If you don't have exact income figures or dates for your previous employment, wait to confirm this information. Don't estimate or guess on your loan applications. When your credit report fails to support any statement on your application, lenders balk at making the loan.
Lenders require documentation to support your loan application. Documentation typically requires several months of pay stubs, copies of your federal tax filings and job confirmation from your employer. If you fail to provide the requested copies in a timely manner, lenders also deny your loan.
Underwriters begin researching your credit history when you file the application for your loan. If you move money, take on extra debt, or close bank accounts or credit cards, the lender views these actions as suspicious behavior. Other acts also make your loan package unattractive to lenders. These include canceling a credit card account, co-signing a loan for another person or taking out new credit cards. Buying a new car sends signals to your potential lender that you don't know how to manage your money. After turning in your application, the best action is to do nothing at all, except to make regular payments on current debt.
- LenderMark.com: What Not to Do After You Apply for a Mortgage
- CBS News: New Bank Rules -- Free Credit Scores with Loan Denials
- U.S. Federal Bureau of Investigation Norfolk Division: Norfolk Woman Pleads Guilty to Lying on Loan Application to Bank of the Commonwealth
- Realtor.com: 10 Things You Shouldn't Do Before Buying a Home
- Realtor.com: Ten Mistakes You Can't Afford