When the Federal Reserve lowered interest rates to near 0% last year, mortgage rates followed suit. The average 30-year fixed-rate mortgage hit 2.65% at its lowest, and the average 15-year fixed-rate mortgage bottomed out at 2.16%. At publication, the 30-year FRM sat at 2.96%, and 15-year FRMs averaged 2.30%.
Despite economic uncertainty brought on by the pandemic, these low-interest rates increased enthusiasm in the housing market for potential home buyers. As more people flock to apply for mortgage loans, lenders are tightening their restrictions.
Unfortunately, many potential borrowers have been or will be denied a mortgage loan. Lenders consider several factors when deciding whether to loan money to a borrower. Not only do mortgage lenders consider income, but they also look at debt, credit score, and lifestyle factors. Within such a competitive market, you'll want to make sure everything lines up if you're going to get approval. (If you want to get a sense of what preapproved rates you'd get in today's mortgage rates market, you can check out Credible's lender marketplace).
There are a few primary reasons your mortgage loan application could be turned down in 2021:
1. Poor credit
One key factor that lenders consider when approving or denying a home loan is credit history. Your credit score is a quick way for lenders to decide whether you represent a trustworthy buyer. The minimum credit score required to purchase a home depends on the type of loan you want. You may qualify for an FHA loan with a score as low as 500 with a 10% down payment. If you want a conventional loan, you'll need a score of between 620 and 660, and a jumbo loan requires a minimum score of 700.
As lenders tighten their restrictions, borrowers who may have qualified in the past may find themselves shut out of a mortgage loan.
In addition to your credit score, a lender looks at your credit report. You may not qualify for a loan if you have a history of missed or late payments, recent bankruptcy or foreclosure, or wage garnishments. In order to qualify, you'll need to work on improving your credit score.
If you're worried that your credit score is too low, you can potentially improve that bad credit by using Credible's marketing partner Experian to boost your credit. You can add bills like rent and your cellphone payment to your credit score.
2. New or unsteady job
Lenders want to give money to people who have the income to make their monthly payments. They look for employment history and annual or monthly income history to determine if you can afford a mortgage. Ideally, you'll have employment dating back at least two years. Lenders will want to see pay stubs and tax statements.
However, if you've changed jobs recently or your work is more fluid (like freelancing), you may have to provide additional documentation to show that you can afford to make the mortgage payments. Alternatively, you could offer a larger down payment rather than a low down payment.
Common ways to show income include:
- Tax returns
- Pay stubs
- 1099 forms
- Statements from investment income
- Alimony or child support statements
When you're looking for a loan, make sure to take advantage of an online mortgage calculator to help determine potential monthly payments. The loan payoff calculator can help narrow down your budget, so you choose a loan you can afford.
3. Large, unknown deposit
While having a sizable down payment can make getting a loan easier, having a history of large deposits into your account without records does not. It is perfectly acceptable for someone to gift you money, but you'll need to provide documentation. If you have a family member or friend who contributes a large sum of money to your purchase, you'll need to have them complete a gift letter stating the details of the transaction.
When you're ready, you can explore your mortgage options in minutes by visiting Credible to compare rates and lenders. Check out Credible and get prequalified today.
4. Last-minute spending on a credit card or change to credit report
One of the most common reasons lenders deny a mortgage loan is a change in the credit report. Your lender can deny your loan up until you sign the final paperwork. If you're approved for a mortgage loan and then use your credit card to purchase furniture for your home, the lender could deny your loan application.
You can prevent having your loan rejected this way by planning. Avoid taking out any loans – like personal loans, auto loans or student loans – or spending too much on your credit card a few weeks before you apply for a mortgage loan. Additionally, don't make any major purchases until after you sign your final loan documents and the key to your new home is in your hand.
Are you ready to see if you qualify for a mortgage loan? Explore your mortgage options by visiting Credible to compare rates and lenders.
Obtaining a home mortgage loan this year could be challenging. But, if you manage your spending, work on your credit score, and keep good financial records, you can substantially improve your chances of approval.
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