Why Your Mortgage Loan could be Denied

It’s a big day for you. You’ve found a St. George home that ticks all the boxes and applied for a mortgage—only to learn your application has been denied. Such a development can feel like a setback, but it’s not a reason alone to give up, especially as a first-time homebuyer. A denial can happen for a host of reasons, including a poor credit score, no credit history, too much debt or insufficient down payment.

To move forward you’ll want to revisit how the lending process works and fully understand the role your credit and finances play. Mortgages are no small commitment, so lenders tend to have a checklist of qualifications that need to be met in order to be approved. Failing to meet just one of these items can be grounds for denial. Here’s what you should do before you recommit yourself to the process.

While each situation is different, there are several common reasons why loans are denied:

Low credit score: The minimum credit score needed to secure a mortgage varies according to the lender and mortgage product. For a conventional mortgage or VA loan, the minimum FICO® Score? needed is typically about 620. For a USDA loan, expect 640. You can get an FHA loan with a credit score as low as 500, but you will have to make a bigger down payment than if you had a higher score.

No credit history: If you don’t use credit cards or don’t have a loan history, you may have what’s called a “thin” credit file. In other words, lenders consider this a very minimal credit history—or none at all. Without such context, lenders might be leery to approve you for a loan unless they can find other reasons to make the case that you’re a responsible borrower.

High debt-to-income (DTI) ratio: As another means to vet you as a potential borrower, lenders will review the percentage of your monthly income dedicated to monthly debts. It may be harder to qualify for a loan if your housing payment is 28% or more of your gross monthly income (31% or more if you’re applying for an FHA loan).

Small down payment: Setting aside money for a home purchase shows lenders you’re serious about the venture, a good sign you’re more likely to repay the mortgage. The bigger the down payment you can make, the better you’ll position yourself to the lender.

Missing application information: Mistakes happen but know that you may be denied if you omit or forget to include certain details. That’s why it’s recommended to review your application carefully to make sure it’s complete before submitting it. You might consider asking a friend or family member to give it a second eye, as the stakes are high.

Recent job change: Stability inspires confidence; recent job changes may hurt your cause. However, having the same job for at least two years may help your chances of approval.

New debts after you apply: This is one of the most common reasons you could be denied a mortgage even after being initially approved. However, you might be confused by this scenario. That’s why it helps to understand the steps involved. When you get a mortgage, your lender will typically pull your credit report and score at least twice — once when you initially apply for the loan, and again shortly before closing. Any major changes can spell trouble, especially if the recheck shows that you’ve opened new credit cards, charged large purchases, or done anything else that could endanger your status as a borrower. So that’s why the experts tell you to refrain from making any major purchases until after closing.

To sum it up: you might experience a snafu in the application process, but it doesn’t necessarily mean a mortgage isn’t in the cards. Some of these issues can be addressed relatively easily, while others might require more work on your end. As a St. George mortgage lender, we’re always here to answer any questions.