With the housing market on the rebound and mortgage rates still incredibly low, it’s a tempting time to buy a home right now. But because of the subprime mortgage industry collapse a few years ago, many mortgage lenders have tightened their standards when it comes to lending.
If you’re ready to make the plunge into home ownership, you may be surprised to find that you’ve been rejected for a mortgage.
Here are 6 common reasons you may be rejected for a mortgage.
Not Enough Credit
Before the housing bubble burst, no credit was good credit, but today no credit is a risk factor. Homebuyers needs to be able to demonstrate a history of managing their credit. New players to the credit game will find it nearly impossible to get a mortgage.
You’re going to need to have an aged credit profile. Your oldest credit sets the age of your account. Another factor is the average age of your credit accounts. If you’ve opened up new credit accounts as of late, it’s going to lower your average credit age.
It’s even more important to have a good mixture of credit. This means a solid credit profile has revolving accounts like credit cards, installment accounts like a car loan and open accounts like a cell phone bill.
It’s more difficult to get a loan with only 5 total accounts. When you have 15+ accounts you’re showing you use credit and can handle it resposnibly.
Too Many Inquiries
Applying for credit cards, mortgages or other types of loans will have a negative effect on your credit score. If you’re on the threshold of good and fair credit, a slight drop of a few points may be the tipping point that prevents you from being approved for a mortgage.
To be safe, don’t apply for new credit 6 months before you apply for a mortgage. You cannot give the impression you’re short on cash and desperate for credit.
Your Credit Score Changed
You may have been pre-approved for a mortgage before you went home shopping. But Fannie Mae requires lenders to run a new credit report just before a loan is funded. Thus, changes to your credit situation while the deal is in escrow can put a wrench in your closing plans.
If you’ve opened a new credit card, financed furniture or made any other changes to your credit profile before closing on your home, expect to have to provide a good explanation or have the deal fall through.
You Don’t Qualify For PMI
If your down payment is less than 20 percent of the sale price, you’ll need to have private mortgage insurance on your loan. PMI is required by most lenders in case you default on the loan.
However, qualifying for a mortgage and qualifying for PMI are two different things. Both companies will run their own credit check and determine if you’re worthy of their services.
Not Enough Reserves
Most lenders like to see that the borrower has proper financial reserves in case of a job loss or other unforeseen event. This means that you need to have money in your savings account, IRA, 401K, stocks or other source to cover a loss of job.
So even if you have good credit, even if you put down a solid down payment, you could still be denied if you don’t have money left in your bank account. Having inadequate reserves can kill your chances of securing your dream home.
The House Appraised Too Low
Just because you and the seller have agreed on a price doesn’t mean the negotiations are over. In a shaky market, the appraised value of the home may be lower than the agreed upon purchase price.
The bank isn’t going to want to loan you more money than the house is worth in case they have to foreclose on it later. In this case, the buyer must come up with more cash as a down payment to maintain the correct loan to value ratio.