1. Not Enough Income
One of the most common reasons why mortgages are denied is that prospective borrowers carry too much debt compared to their incomes. For Fannie Mae or Freddie Mac conforming loans, the maximum debt-to-income ratio is usually 45 percent. This means that your gross monthly income divided by your total monthly debts cannot be more than 45 percent.
- Minimum credit card payments
- Car payments
- Student loans
- Alimony/child support payments
- Mortgage payment including real estate taxes, homeowner’s insurance, PMI & HOA or condo fees.
Do NOT include:
- Credit card balances that you pay off in full each month
- Utility bills (i.e. electric, gas, cable, internet, phone)
Note: If you are applying with a co-borrower, include both you and your co-borrower’s monthly debts.
2. Unstable Income
For self-employed borrowers or people who receive bonuses, commissions or tips as part of their income, there is typically a two year history needed. Income from rental properties, 1099s or investment income like capital gains would also be included in this category. For this type of income, an average of the last 2 years, as reported on the tax returns, will be used.
For borrowers who are re-entering the workforce after a long period of time, a 6 month period of employment will need to be established before the income can be considered “stable”.
3. Bad Credit History
Bad credit is by far the most common reason why mortgage applications are denied. Late payments, judgments, collections or bankruptcies always have the potential of causing issues with your application. It is therefore critical to review your credit report with a mortgage professional well before you plan to submit offers and apply for a loan.
Free credit reports are available online, but these usually contain only one score from one credit bureau. Mortgage companies will pull from all three credit bureaus and use the middle score. Most issues with credit reports can be repaired in a relatively short amount of time if you are aware of the problems.
4. Low Appraisal
Before applying for a mortgage, it is important to review recent sales in your neighborhood. An appraiser will compare your home with 4-6 other homes that are most similar to yours and have sold within the past 3-4 months. To start, you can go to sites like Zillow & Trulia, but it is always better to receive information directly from a local real estate agent since their data will be most accurate and up to date.
5. Undocumented Funds
Many people do not realize that all funds used at closing must be sourced with documentation. Therefore, any transfers or large deposits (not including income from your job) will need to be explained and tracked by providing a copy of the check deposited and/or a monthly bank statement from the account the money was transferred from. Every penny must be accounted for so the underwriter can verify where it came from. Do not deposit cash into your account unless it is at least three months before closing.
Co-mingling funds with a business is also not a good idea because the lender will require proof that using those funds will not affect the health of the business. It is always best to have your money put aside in a savings account months before you are planning to buy a house.
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