If you’re planning on buying a home, the last thing you want to worry about is your mortgage loan being denied. Understanding why mortgages get denied may help this from happening to you. To better prepare you for applying for a mortgage loan, here is a list of the top reasons mortgage loans are denied.

1. Bad credit history. If you have a low credit score or a history of late payments, you may be at risk for mortgage loan denial. Check your credit score now, so you know where you stand. There may still be time for improving your score. You may also be in jeopardy of loan denial if you have no credit history. That’s why it’s so important to start building a credit history early. You can do this with student loans, auto loans, and even credit cards. Paying on time is key to good credit history, as is paying down debt. If your credit history is good, be sure to keep it that way during the mortgage application process. Don’t apply for any new loans or credit cards and keep your accounts in good standing.

2. Not enough of a down payment. Mortgage lenders require a certain down payment when purchasing a home. The down payment is not something that can be rolled into the mortgage loan, it needs to be cash you have on hand. If you don’t have the cash available, perhaps you can borrow from a family member. If you do this, your lender will want to know where you got the money, so be prepared to provide information.

3. Property appraisal is significantly lower than the purchase price. This would mean the loan-to-value ratio is too high. An option may be to go back to the seller and negotiate a lower price to be more in line with the appraisal. Another may be to increase your down payment to compensate for the difference.

4. Debt-to-income (DTI) ratio is too high. Your DTI is important to lenders. They want to ensure you can make your loan payments. Lenders like to see a DTI in the low 40 percent range. To improve your DTI, pay down your debt now, before applying for a mortgage loan.

5. Change in job status. Mortgage lenders like to see stability in employment. Working for the same employer for a long time shows this work stability.  If you move around from job to job, you may be considered a higher risk.

6. Withholding information on your application. Lenders do a thorough review and will uncover inconsistencies. Trying to withhold information concerning debt or other financial matters may result in denial. Answer all of the questions honestly.

7. Suspicious banking. Large suspicious deposits or other large transfers can throw up a red flag to lenders.

Shopping for a Mortgage Loan

We realize it’s discouraging to be denied for a mortgage loan and hope this informational blog will enable you to be more proactive in preparing yourself for approval. A mortgage loan can also be denied after pre-approval if you do not continue to meet the requirements. For instance, if you have taken on more debt, if your credit score has changed or if you have a change of employment. When shopping for a mortgage loan, remember that not all mortgage loans are created equal. Spirit Financial Credit Union offers various mortgage products to meet your needs. This includes conventional mortgage loans, FHA loans, VA loans, and PHFA loans, as well as construction mortgage loans. Learn more and view our competitive mortgage loan rates on our website. If you’re just starting the home buying process, be sure to check out our informational Home Buyer’s Guide with helpful tips to guide you through the process.