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If you’re buying a home, you’re probably applying for a mortgage. The mortgage application can feel like an IRS audit: tons of paperwork, a thousand questions, a loan officer who can make an IRS auditor look trusting and cheery — and more paperwork.
And unfortunately, even when you think you’ve done everything right, your mortgage could still get rejected for surprising reasons. We asked mortgage lending experts to run down some of these unlikely — but very real reasons — home loans get rejected. Make sure you know these reasons for rejection, so you can avoid them.
1. You have too many changes in your job history.
News flash: Lenders like stability. And nothing screams unstable more than treating jobs like fashion trends. “Usually, a borrower needs to be in the same job for two years or more. In some cases, if a borrower switches jobs, but keeps working in the same industry, they can still get a loan,” said Mark Ferguson, a real estate agent and investor who runs InvestFourMore.
2. You retired early.
You’ve achieved a nice bit of success and have decided to retire early and buy that dream home. Despite your good financial standing, you might need a lot of cash to buy that home. “Many people work very hard to save and retire early, but have little income,” said Ferguson. "Because they have little income, lenders will not want to give them a new loan."
3. You have business debt.
You might think that your business finances are separate from your personal finances. Unfortunately, if you have personally guaranteed any business loans using your own Social Security number, they will show up on your credit report and could cause your mortgage loan to be rejected, said Ferguson.
4. You recently purchased or leased a new car.
Taking out a loan to buy a car, or leasing a car, in the months before your home loan closes could be a deal-breaker, said Mindy Jensen, a real estate investor and community manager with BiggerPockets, a real estate social network and marketplace. Having a car payment increases your monthly debt obligations, increases your debt-to-income ratio, and could cause your loan officer to worry about your ability to pay your mortgage.
“Play it safe, and don't buy anything outside groceries and utilities until after your home closes,” said Jensen.
5. You borrowed your down payment.
Lenders want home buyers to have some “skin in the game,” said Jensen. “It would be far too easy to just walk away from a home you didn't like, couldn't sell or outgrew if you didn't have anything to lose,” she said. Yes, your credit would be trashed, but there’s nothing like equity to motivate you to keep paying that mortgage. Jensen said that borrowing the down payment also shows lenders that you either don't make enough money to save up for a home, or you don't manage your money correctly.
6. Your condo is unwarrantable and not on the FHA-approved condo list.
Loans are sold on the open market, and the government-backed Fannie Mae and Freddie Mac programs buy a substantial amount of those loans. “But Fannie and Freddie have standards, and if too many units [in a condo complex] are investor-owned rather than owner-occupied, or if one owner owns more than a certain percentage of units, Fannie and Freddie won't buy them,” said Jensen. You could still get an FHA loan rather than a conventional loan, but if the complex isn't already on the FHA-approved condo list, it's difficult to change that, she said.
7. You aren't borrowing enough money.
Believe it or not, borrowing too little money can get your loan rejected, said Abby J. Shemesh, acquisitions director and managing partner with AmerinoteXchange, a firm that buys and manages mortgage notes. “Most lenders have a minimum loan requirement of $50,000. In some cases that minimum is $75,000 to $100,000,” he said. Shemesh explained that lenders make money on interest, and the higher the loan amount, the higher the profit. “When the risk outweighs the profit, most of the time a borrower will see a declined loan application,” he said.
8. You have too many company write-offs as a self-employed borrower.
If you're a self-employed borrower who runs a successful business, you could still get rejected for a home loan, said Shemesh. For instance, you might think that because your business is grossing impressive numbers, banks will green-light your loan. “This will not be the case,” said Shemesh. “The banks and lenders look at a borrower’s net income, after taxes. If the borrower is writing everything off to avoid a high tax bill at the end of the year, this could spell trouble for that borrower's ability to get approved for a mortgage loan,” he said.
9. You opened a new credit card.
New houses tend to need new things, so you might be tempted to take a credit card company up on a 0% APR offer. But that might lose you the home loan, said Shemesh. It does depend on the circumstances, however. For instance, if it’s the only credit card you have, or, if you have many and they’re maxed out and you add this new one, your loan has a good chance of being denied, said Shemesh. On the other hand, if you have shown that you handle credit well, with modest outstanding balances, you might be fine.
10. You closed a credit card.
You’d think closing a credit card would be a good thing, but it could actually change the way lenders see your credit history, said Shemesh. Basically, lenders want to see a low outstanding balance compared to the amount of available credit you have. This shows that you can handle credit responsibly, he said. But when you close a credit card with a zero balance, and keep cards with an outstanding balance, you raise that ratio.
11. You owe child support or alimony.
Child support and alimony payments are just like having another loan, so they count as part of your DTI. “Depending on the circumstances of the borrower's credit score, income and background check, this item could very well kill a mortgage loan on arrival,” said Shemesh. The only way that this wouldn't affect a loan approval is if the borrower’s DTI is extremely low, the income history is safe and extremely extensive and/or their FICO credit score is over a 720, he said. “If none of these items are met, then count on the loan being declined with a traditional lender,” Shemesh said.
12. You paid off an old debt that went to collections.
Debts that have gone to collections can hurt your credit score, but they also do not stay on your credit report forever. Unfortunately, bill collectors might still call you to pay off those debts. If you do pay, that could show up on your report and kill your mortgage loan, said Lori Askins of BR Finance Solutions. So wait till after your mortgage goes through and seek the advice of a credit repair firm, she said. “The credit repair firm will have industry know-how and will be able to alleviate your debt without lowering your credit score,” she said.
13. The homeowners' association is no good.
If you’re buying a condo or townhome, expect the lender to investigate the homeowners' association as much as the property, said Shemesh. “A loan can easily be disqualified if the bank does not like the way the HOA conducts itself,” he said. He suggested doing a thorough exterior inspection of the property. “If you see major work that needs to be done to the outside of the property, and a very high HOA fee as well, chances are someone in the HOA is not doing their job,” said Shemesh.
14. The home doesn’t appraise for the buying price.
The bank wants a guarantee that if you stop paying your mortgage and default on your mortgage, it will still be able to get its money back through the sale of the property. So, if the home doesn’t appraise for the selling price, you’ll either have to come up with a bigger down payment or your loan will be declined, said Ray Rodriguez, regional mortgages sales manager at TD Bank in Cherry Hill, New Jersey.
15. Interest rates change.
Mortgage rates today might not be the mortgage rates of tomorrow. But if they go up during your loan application and before you lock in your rate, that could cause your loan to get denied, said Amelia Robinette, a real estate agent and adviser with NoVa House and Home. That’s because a higher interest rate means a higher monthly payment, all other things being equal. If you were already at the maximum monthly payment for your situation, a higher interest rate could push you into the too- risky category, said Robinette.