After you apply for a mortgage loan, an underwriter studies your application to determine whether you qualify for the loan. There are several reasons why an underwriter might deny your loan: A low credit score, debt-to-income ratios that are too high and a shaky employment history are among the most common.
Mortgage lenders rely heavily on your credit score, a three-digit number that instantly tells a lender how wisely you managed your money in the past. If you have a history of missed payments and maxed-out credit cards, the odds are good that your credit score is low. Recent bankruptcies or foreclosures also lower your score. In general, mortgage lenders consider a score of 750 or higher on the popular FICO credit-scoring system as excellent. If your score is below 600, you'll generally struggle to obtain a mortgage loan from conventional lenders, even if you agree to pay higher interest rates.
Lenders want to make sure that you have a high enough monthly income to pay your mortgage loan payments. They also want to make sure that you're not overwhelmed with too much debt. That's why underwriters look at your debt-to-income ratio when determining whether you qualify for a home loan. Your front-end ratio calculates how much of your gross monthly income — your income before taxes — is consumed by the total monthly mortgage payment. Generally, lenders prefer working with borrowers whose mortgage payments consume no more than 28 percent of their gross monthly incomes. Your back-end ratio calculates how much of your gross monthly income is eaten away by all your monthly debts — everything from your student-loan payment to your monthly car payment, including your mortgage payment. Lenders prefer working with borrowers whose total monthly debts equal no more than 36 percent of their gross monthly incomes.
Most lenders prefer passing out mortgage dollars to borrowers who are working in their current jobs for at least two years. Borrowers who don't fall into this category, or those who work as independent contractors, will have to prove their steady incomes by providing their prospective lenders with copies of their income tax returns for the last two or three years.
Another reason for a mortgage denial is a low appraisal of the property. This means the value of the property isn't enough to back the amount of the loan. If this is the cause for your refusal, you might want to apply to another lender who will do a new appraisal. The lender who denied your mortgage can't order a second appraisal of the property, but another lender's appraiser might put a higher value on the home. This occurs often enough that it's worth a shot to go through the process with a different lender if it's the only reason you were denied a mortgage.
If Underwriters Reject Your Loan Application
You don't have to give up hope of ever becoming a homeowner even if a mortgage underwriter rejects your application for a home loan. It just might not be the right time to buy a home. By law, the lender has to provide you with a letter disclosing the reason for your rejection, but these letters are often very general in nature. If you can boost your monthly income and/or lower your debts, you might improve your debt-to-income ratio enough to get an approval. And if you begin a new history of paying your bills on time and reducing your credit card debt, you might boost your credit score by enough to qualify the next time you apply for a mortgage loan.
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