When you are ready to buy a home it can be a frustrating experience if your mortgage application is denied. When you feel ready to buy a home but lenders don’t seem to agree, you’re going to want to understand exactly why you can’t get approved for a home loan. Below we have provided you with some KEY QUESTIONS to ask your lender if you get denied. Not only will these questions get your loan application back on the road to approved, but it will turn that Denial into an APPROVAL. 

When it comes to approving or denying mortgage applications, lenders abide by rules and guidelines in handbooks that are hundreds of pages long. Depending on the loan type you’re seeking, these rules might come from Fannie Mae, Freddie Mac, the U.S. Department of Veterans Affairs (VA), the Federal Housing Administration (FHA) or the U.S. Department of Agriculture (USDA).

Keep in mind, individual lenders may have additional, internal rules they follow in addition to the rules provided by the lending agencies. Only a few lenders follow their own rules because they plan to hold onto the loans. Most lenders sell their mortgages to Fannie Mae or Freddie Mac, so we’re going to talk about the reasons your loan can possibly be denied and provide some solutions by equipping you with questions to ask your Loan Officer. 

1. Credit Report Errors/Identity Theft

Your Mortgage Loan Officer should review all identifying information on your credit report to check for errors, duplicative information or incorrect information. 

ASK If you have any errors on your credit report or if you have had your identity stolen and damaged ask your Loan Officer if they will help you clear all incorrect information. Remember they should offer this as a free service. It is important to allow your Loan Officer help you with this process because the resulting inaccurate information in your credit report can prevent you from qualifying for a mortgage. 

2. No Credit History

If you have no official credit history, you can still qualify for a mortgage using nontraditional credit. 

ASK Your Loan Officer about different options for a person with a limited credit profile. Having limited credit can be considered being a responsible consumer. 

Fannie Mae has a program for borrowers with limited credit. It’s called using non-traditional credit to qualify. If you can show two to four sources of proof of steady payments over the last 12-24 months, not typically reported to credit bureaus, such as rent, insurance or utility payments your Loan Officer should still be able to approve your loan. 

FHA Another great option is to apply for a Federal Housing Administration Loan (FHA). With an FHA loan, you can count your last two years of college or graduate school as part of your employment history, which can help you qualify for a loan

3. Too Many Recent Inquiries for New Credit

Lenders will consider you a higher-risk borrower if you have been applying for lots of new credit recently, even if you didn’t accept all the credit you were offered—but especially if you did.

This is an easy fix. Credit underwriters must ensure that you have not recently opened any new credit that is not showing on your credit report because it is too new. 

ASK Your Loan Officer if you can have a copy of the credit report in order to prepare a letter of explanation for each inquiry listed. It is important to attest to the lender that you have not opened any new debt in the last 90 days and that each inquiry does not represent new debt. However, if you did open new debt before applying for a mortgage loan, you will need to provide information about the new loan. For Example: how much is the loan, the monthly payment amount and how many months you have committed to making that payment. 

4. Foreclosure

If you have a foreclosure on your credit because you used to own a home, but due to unfortunate circumstances you lost it to foreclosure, the standard waiting period until you can buy a new home is 36 months. The lesser offenses—deed in lieu of foreclosure, short sale or a housing charge-off—require approx. 24 months.  

ASK Your Loan Officer the date the foreclosure is reporting on your credit report, so you can cross check it with your files and verify that the date is correct. It can be the difference of you buying the house today or waiting a year. 

5. Judgment or Lien

Outstanding judgments and liens must be paid off before the lender is able to approve your loan application, so if you don’t have enough funds to pay them, your lender will reject your application.

ASK Your Loan Officer to help you locate the case # on the judgements, and the lien holder on your credit reports so that you can contact them and start working on paying them off or making a settlement offer. Once you negotiate a payment, make sure you pay the debt by the date required. If you forfeit on a settlement agreement the lender might not offer you another opportunity to settle.

6. Bankruptcy

If you file a Chapter 7 Bankruptcy, Fannie Mae, Freddie Mac and FHA guidelines require that you wait 24 months from the discharge date to apply for a mortgage loan. If you file a Chapter 13 Bankruptcy you should be able to apply for a mortgage loan once a payment history is established with the Bankruptcy Trustee. Typically 3-6 months. 

ASK  Your Loan Officer if they need a copy of your bankruptcy filings and discharge papers. Make a copy of your entire package and give it to your Loan Officer. You will also need to write a letter to explain your misfortune and why you had to file bankruptcy and emphasize that it was a once in a lifetime occurrence and you don’t anticipate finding yourself in that position again. 

Once in a lifetime extenuating circumstances such as divorce, high medical bills or being laid off from work. Evidence of your misfortune and subsequent turnaround can help you get a mortgage approval sooner.

7. Past-due Payments

Too many late payments will harm your credit score, possibly to the point where it’s too low to qualify. And you can’t get approved while you have overdue payments outstanding.

ASK Your Loan Officer the date of your most recent late payment. You will not be eligible to submit an application for a mortgage until you have waited at least 12 months from the last late payment. This can work to your advantage. For the next 12 months, pay down your debt, make sure you do not pay anything late, and save money toward your down payment. You will be ready and prepared when it is time to re-apply for a mortgage loan.  

8. Overdue Mortgage

If you have an existing first or second mortgage that is 60 days or more delinquent, your application will be denied.

ASK Your Loan Officer the date of your last late mortgage payment that is reporting on your credit report. You will need to wait 12 months from that date to reapply for a mortgage approval. Use the time to catch up your late payments, pay down some debt and pay your bills on time.

9. Debt and Other Liabilities Too High

Add the housing payment you want to take on to all your payments on credit cards, installment loans with more than 10 payments remaining and other debts with recurring payments. Then add any child support or alimony you pay. The total can’t exceed 50% of your income. Depending on your overall financial picture, sometimes the maximum is only 36% or 45%.

When calculating your debt-to-income (DTI) ratio, be aware that your lender’s calculation of your housing payment includes not only the principal and interest you’ll pay on your mortgage, but also homeowner, flood and mortgage insurance premiums, as well as property taxes and homeowners association fees.

If your DTI (debt-to-income) ratio is too high, and it gets you disqualified for a mortgage loan:

ASK Your Loan Officer to list the items you need to pay off to get your debt ratio inline with the approval process.  Next ask your Loan Officer if you should lower your purchase price in order to get approved. 

10. Student Loan Debt in Forbearance or Deferment

What’s going on when your student loan payment is currently $0 because you’re in forbearance or deferment, but your lender says you don’t qualify because of your student loan? How can you get denied based on a payment that’s not affecting your monthly obligations? Since your payment won’t be $0 forever, your lender will factor in a future repayment based on your loan balance and terms.

ASK Your Loan Officer the payment amount being used for your student loan debt. Then ask your lender what is the best way to count your student loan debt in your debt ratio: 

• Should you cancel your forebearance
• Should you have the student loan company calculate a payment
• Should you try to consolidate your Student Loans into a smaller payment

Let your Loan Officer know that you will do what is needed to get the debt amount lowered to help with qualifying with your debt-to-income ratio

11. Employment History Too Short or Unstable

Lenders want to see a history of stable and predictable wage or salary income, ideally with at least a two-year history. You also can qualify with many other types of income, including long-term disability, interest and dividends, public assistance and retirement income. If it’s unclear whether you can hold down a job or receive a consistent income, you’ll need to build a longer history.

ASK Your Loan Officer how many more months are needed to qualify for your mortgage application. Then come back to the lender once you have enough time on the job to meet the requirement.

12. Insufficient Documentation of Income or Assets

Lenders require documents such as pay stubs, W-2 forms, bank statements and tax returns to prove your income and assets. If you can’t provide these documents, your loan will not be approved.

ASK Your Loan Officer if you can provide your offer letter that your employer sent you, or can your lender do a verification of employment. You might also want to ask your lender to postpone your pre-approval process while you go to your employer and order replacement W-2’s and file your tax returns. 

13. Assets Not Seasoned

Large deposits that haven’t been in your account for at least two months can be evidence that you recently borrowed money to afford your down payment or meet reserve requirements. Lenders will require proof of where the money came from—a gift letter from a relative, proof that you just sold your car—to show that’s not the case.

ASK your lender if you can postpone your pre-approval process. You will return to begin the process again once your assets are seasoned. That way you do not have to provide documentation of where the assets came from