How to Avoid Getting Turned Down for a Mortgage Loan

Posted by Nicholas McMillan on Thursday, October 5, 2017 at 12:44 PM By Nicholas McMillan / October 5, 2017 Comment

How to Avoid Getting Turned Down for a Mortgage Loan

Home ownership is a dream for many families, but the dream can be derailed if you haven’t planned for obtaining financing you’ll need. When we’re younger, we don’t always think about how our choices will affect our financial possibilities a few years down the road. Some people would love to buy a home for their families, but they don’t think they can qualify for a mortgage, and the idea of getting turned down creates a lot of anxiety. However, there are options, and many people rise above credit issues, lack of liquid income, and other obstacles.

Follow these steps to help ensure you can obtain the funding you need to buy your dream home.

Know Your Credit Score

This step may seem insignificant, but knowing where you stand going in will help you manage expectations. A history of missed payments or frequent late payments, can reduce your credit score and stop an application in its tracks. Before applying for a home loan, buyers should verify that the data in their credit reports is accurate, and correct any mistakes they find. Lowering debt, and paying bills on time, are crucial to earning and maintaining good credit and earning a good credit score.

Save Cash.

While requirements have changed, the benefits of cash on hand when applying for a mortgage has remained. Arriving with zero cash will almost certainly result in rejection. Lenders are wary now, refusing to offer zero-down payment options. Understand ahead of time how much house is realistic for your budget. Most lenders will require a minimum 3.5% down payment. Aim higher to improve odds of approval, decrease monthly payments, and alleviate the need for private mortgage insurance.

Pay Down and Avoid Debt

It isn’t necessary to have a zero balance on credit cards when applying for a loan but it is mandatory that the balance is low. What debt you have determines what you can handle in the future. A debt-to-income ratio of 35% means that you can pay your bills with money left over and often constitutes the ceiling for lenders. Paying down debt lowers this ratio and aids applications for a mortgage.

Understand Today’s Market

Lending requirements were more lenient prior to the housing crisis of 2008–2009, providing more opportunities for people to be approved for funding. Today’s real estate market bears the scars, with stringent underwriting requirements and greater importance placed on proving financial stability.

Get Preapproved for a Mortgage

Walking into a potential new home when you’re preapproved for a loan allows you to focus on homes you know you can afford. Your limit is predetermined, and you avoid falling in love with a home beyond your means. Preapprovals include how much you can afford, the interest rate on a loan, and a letter for the seller, in the event of an accepted bid. Learn more about the preapproval process.

Understand Your Budget

Lenders often preapprove buyers for more house than they can actually afford, based on their income and credit reports. Many expenses are not taken into account by the banks, including groceries, fuel, insurance, and day care. Be careful that you don’t let lenders dictate the loan amount. Understand your finances so you know how much you can comfortably afford, and choose a house that fits within that budget.

Sources:

http://www.moneycrashers.com/getting-approved-mortgage-loan/

https://www.moneyunder30.com/get-approved-for-a-mortgage

https://www.zillow.com/mortgage-learning/qualifying-for-a-mortgage/

http://www.myfico.com/credit-education/improve-your-credit-score/

http://www.experian.com/blogs/ask-experian/credit-education/improving-credit/improve-credit-score/

http://money.cnn.com/2017/08/11/real_estate/save-down-payment/index.html

https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/

http://www.investopedia.com/university/ratios/debt/ratio3.asp

https://bettermoneyhabits.bankofamerica.com/en/debt/how-to-pay-off-credit-card-debt-fast

https://seekingalpha.com/article/4060386-u-s-real-estate-market-trends-characteristics-outlook

http://www.investopedia.com/mortgage/pre-approval/