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10 Surprising Reasons Why Your Mortgage Loan Could be Rejected

new mortgage rulesAmericans today are facing a frustrating conundrum when it comes to buying a home. Even though mortgage rates today are the lowest they have been in history, the standards surrounding who can qualify for a mortgage have only become more strict — it’s simultaneously easier and more difficult than ever to buy a home today.

According to the Federal Financial Institutions Examination Council, over 2 million mortgage applications were rejected in 2011. So when attempting to finance the home of your dreams, how can you ensure you present yourself to mortgage lenders as a qualified applicant and avoid becoming another homeless statistic?

It’s common knowledge for most people who are shopping around for a home loan that they should maintain good credit and reduce their debts in order to qualify, but there are a number of lesser-known factors that can crush your chances of becoming a homeowner. Be sure none of the following 10 circumstances could add a red mark to your mortgage application.

10 Things Preventing You from Qualifying for a Mortgage

1. You have had too many jobs. One of the new mortgage rules that is very important to lenders is the ability to show proof that you’ve been consistently employed for at least the past two years. However, some lenders are taking that a step further and requiring that borrowers hold the same job over those two years.

If you have changed jobs as a result of a promotion or in order to advance within your field, there is no need to worry. On the other hand, if you have jumped between employers and/or fields recently, it may signal a red flag to lenders that your employment history is unstable, especially if the switch has affected your income.

2. You owe child support or alimony. Sure it isn’t a credit card bill or car payment, but money owed for child support or alimony will be treated like any other debt — you are required to report it on your mortgage application, and if you fail to do so, your lender will find out. Marylin Lewis of MSN reports that loan processors will contact “courts and lawyers to confirm whether you are married or divorced and if you owe child support, alimony or a court-awarded judgment.”

3. You were just approved for a new credit card. Any changes to your credit availability or debt owed that occur during the time between submitting your mortgage application and obtaining approval can throw a wrench in the process. Your lender will be notified if you are granted new credit after submitting your mortgage application, which can slow the review process or even cause your application to be rejected.

4. You closed a credit card account you never use. The same rules for opening accounts apply to closing them as well. You might think that by eliminating potential sources of debt, you’re demonstrating responsibility when it comes to managing your finances — a positive in the eyes of lenders. However, closing a line of credit can actually hurt the numbers that lenders examine when determining your risk as a borrower.

One of the major factors affecting whether or not you’re approved for a home loan is your credit utilization ratio. This is the total amount of credit extended to you compared with how much of that credit you’re actually using. The closer you are to maxing your available credit, the less favorable your ratio. Closing a credit account reduces the total amount of credit to your name, while your debt load remains the same — increasing your credit utilization ratio and the likelihood your mortgage application will be denied.

5. You borrowed money from a friend for the down payment. Don’t try and pass off a loan as your own money, even if you’re borrowing from a close friend or relative in order to come up with a sufficient down payment on a home. Mortgage processors will do their best to vet the sources of your down payment funds, and if they find out that you are indebted to someone else for a portion of it, there’s a good chance you will be denied the loan.

6. Your condo’s tenants are behind on their HOA dues. When you’re looking to buy a condo instead of a house, your finances aren’t the only ones subject to approval. The FHA requires that no more than 15 percent of tenants within a condominium complex be over 60 days late on Homeowner’s Association dues (recently extended from 30 days).

In areas where delinquencies and foreclosure are rampant, it’s common for well over 15 percent of condo owners within complex to have quit paying HOA fees, which means it’s time to find a new condo or be ready to pay cash.

7. You’re want to borrow too little. It makes sense that getting approved on a giant loan would be difficult, but a loan too small? Many borrowers experience a hard time obtaining small mortgage loans of $50,000 or less when the property they’re attempting to finance is simply not expensive. The problem is that it costs a lender just as much money to fund a small loan as a large one, and the interest recouped on such a small principal balance is often not enough to make the deal worthwhile.

8. You paid off that old collection account. Again seemingly counter-intuitive, paying off old debts while you are going through the mortgage approval process could result in a denial. While accounts in collections are generally a deal-breaker for lenders, sometimes a debt can be so old that it doesn’t even show up on your credit report any longer. Even so, the bill collector will be sure to call and remind you of the debt you owe.

Wait until your mortgage application goes through before addressing this debt. Paying off a collections account that has fallen off your credit report will “reactivate” it and show recent negative activity.

9. Your credit score isn’t what you think it is. Did you know that you have not one, not a few, but 49 FICO credit scores? And they all differ from one another, based on the particular algorithm used by each credit scoring entity. Unfortunately, that means it’s very likely that when you check your credit, the score you receive is not the same as the one your lender sees.

Rather than focusing on your credit score, which is a somewhat subjective number depending on who is calculating it, pay close attention to your credit reports from the three major bureaus instead. Look for any errors or negative items that could prevent you from obtaining a mortgage, and work on cleaning up your credit before applying for a loan.

10. Your loan will be sold on the secondary market. This is pretty tough to avoid, as most mortgage loans — even those funded by community banks and credit unions — are often sold on the secondary market multiple times. This makes it harder for you to get a loan in the first place as the qualification standards will vary, not to mention be that much stricter since there is increased risk riding on your ability to repay the mortgage.

If you are rejected for a mortgage, it’s important to sit down with the lender and understand the reasoning behind the decision. Usually, as long as you are honest on your application and have sufficient income and credit score, seeking a different lender is all it takes to overcome a loan rejection. However, there is always the possibility that an unknown issue is raising red flags, so learning what that problem is and fixing it as soon as possible will help you to finally become a homeowner.

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  • Franklin

    The person that wrote this is clearly not educated in the mortgage industry. Credit utilization has close to nothing to do with the decision making of lenders and everything to do with credit scoring models used by Experian, Equifax and TransUnion. Secondly, borrowers cannot be denied a loan because it is too small. This is a clear violation of ECOA, which is now closely scrutinized by the CFPB. Accounts in collections are not deal breakers for lenders, while accounts that are judgments are.

    This site is very well designed and has a lot of information, but nearly everything written in this article is either incorrect or severely lacking necessary content and explanation. There is enough misinformation for borrowers, please do not add to the problem.

    • GBR Casey

      Hey Franklin, do you work in the mortgage industry yourself? You’re obviously very passionate about the topic …but I do stand by all of the information I included in the post.

      Glad you at least like the design of the site.

      • franklinanthony

        Casey, I do work in the industry and have over the last 10 years. You can stand by the information, but it does not make it correct. I will use #10 for example. The existence of a secondary market actually increases the likelihood of loan approval because there are more options available to the consumer. If banks could only underwrite based on their risk standards, then options would be far more limited and narrower in scope. Due to the opportunity to sell loans on the secondary market and the existence of mortgage backed securities, lenders can provide expanded options.

        To use a loose analogy. Say you live in a small rural town that has one car dealership. There is no competition and no other options. You go to that dealership and essentially buy the car they sell and have a tough time negotiating a better deal because there’s no other dealers in town. Twenty miles down the road, the town has 7 car dealerships. That town is similar to the secondary market. There’s more dealers, which means there’s more competition and different brands of cars avaiable. Competition will typically lead to better prices and options for the consumer. It’s no different in the mortgage industry.

        Part of the reason we saw economic collapse, which started in the housing and lending sector is because the secondary market became too lax with underwriting standards. MBS became so profitable, that the market just wanted the product quicker, therefore cutting requirements for the loans. The market is much tighter because there are less players in the secondary market, but to state that the secondary market is a reason your application could be rejected is misunderstanding the secondary market and its function.

        • GBR Casey

          Let me provide you with a couple of resources that reinforce why #10 is included in this list:

          From a lender with Sonoma County Mortgages:

          “the mortgage companies that create and bundle the loans to be sold in the secondary market do not want to put themselves in selling a risky asset to Wall Street. If that mortgage loan goes bad, it falls back on the mortgage company and their ratings with the secondary market fall. This is the type of activity that can make or break a successful mortgage company.”

          http://www.sonomacountymortgages.com/2012/02/loan-denied-mortgage-company/#ixzz2W1YxL4Nw

          From MSN:

          “Mortgage lenders naturally want to avoid repeating mistakes, so it’s not surprising that they would look more closely at applicants’ financial situations. But changes in the secondary mortgage market have made them extra cautious.

          Greg Cook, a licensed California real-estate broker and mortgage banker, says that it used to be easy for lenders to get their loans insured by the Federal Housing Administration or guaranteed by Fannie Mae or Freddie Mac. Only in the case of fraud would these organizations require lenders to repurchase a mortgage.

          ‘Now, if FHA feels the lender didn’t follow guidelines, (it) can refuse to insure and the lender has to pony up the cash to replace the funds on (its) warehouse line,” Cook says. “Multiple buybacks can bankrupt a small lender.’

          With lenders facing greater responsibility for the loans they originate, they have no choice but to be extremely cautious in approving borrowers.”

          http://realestate.msn.com/article.aspx?cp-documentid=25828886

          • franklinanthony

            Are secondary markets tighter than in the past? Absolutely, but that does not mean the secondary market makes it more difficult to get a loan. The secondary market does not prevent someone from getting a loan. The statement below is false:

            “This is pretty tough to avoid, as most mortgage loans are often sold on the secondary market multiple times. This makes it harder for you to get a loan in the first place.”

            The key sentence that is false is the final sentence and again I refer to my previous post. The existence of the secondary market does not make loans harder to get, it actually expands the options because lenders are not only offer products for loans they will keep.

            If you go to a local bank that does not utilize the secondary market and a lender that does utilize the secondary market, you will quickly see which lender has more options available, increasing the chances for loan approval.

            Buybacks and stricter standards in the secondary market make it more difficult to gain approval in comparison to the past standards, but that does not mean the secondary market makes it more difficult for approval in comparison to the absence of the secondary market.

            If this were a test and a true/false question was posed: True or false, the secondary market prevents borrowers from getting approved for mortgage loans, the answer would be false.

          • Jim

            Actually, I’m running into this exact problem right now. I live in a condo and am trying to refinance a portfolio (i.e., non-FNMA or Freddie) loan. I’m having a very difficult time because my condo is not FNMA or Freddie-compliant, so hardly any lender will underwrite it, because almost all lenders sell their mortgages. But I have found a bank that may keep the mortgage “on their books,” but that bank has much more stringent underwriting requirements (increased LTV, smaller DTI ratio, etc.). It’s very frustrating.

          • GBR Casey

            Jim, sorry you’re having such a tough time, but I appreciate you sharing your personal experience. I’m sure plenty of readers can relate.

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