You’re deep in the process of buying your dream home when you learn that the bank denied your loan application. This frustrating scenario happens more often than you’d think, and it always stings. Keep reading to discover how you can keep your dream home within reach.
The loan approval process
Before you give up on homeownership, it’s vital to remember that there are many home loans available to qualified buyers. The key to successfully obtaining financing the second time around lies in figuring out why your initial loan application was not approved.
The loan approval process centers around a professional known as the loan underwriter. Relying on information regarding your financial status and the appraised value of the property, the loan underwriter uses sophisticated techniques to determine the level of risk involved in loaning you money. If they decide the likelihood of you defaulting on the loan is too high, you won’t get the home loan.
Let’s look at some of the typical reasons your loan was not approved and how you may still get the home loan you need to purchase your new home.
Three ways to turn a denial into a yes
Financial institutions want to make money on their home loans. To cut down on the risk of a loan default, lenders stick to strict lending guidelines and will often deny applications that don’t meet them. Follow along for three of the most common reasons your loan application might not succeed.
#1- Low credit score
A lender checks your credit score in assessing your overall creditworthiness. Your credit score, also known as a FICO score, represents your current credit situation with a score from 300 to 850. Ideally, a mortgage lender wants to see a FICO score of close to 700. You will face loan denial, higher interest rates, and fewer low down payment opportunities with a lower score.
The good news is that a low credit score alone won’t keep you from buying a home. There are home loans available for people with less than flawless credit. Check into government-backed loans such as (1) FHA, (2) VA, and (3) USDA. An Independent Mortgage Broker can be a great resource to get such loans. They work with multiple lenders that specialize in working with well-deserving but lower FICO score borrowers. Even down to a 580 score.
Read here to learn more about how a low credit score doesn’t have to slam the door shut on homeownership.
#2- High loan-to-value
Unless you qualify for one-hundred-percent financing, your lender might balk at approving a home loan with a high loan-to-value ratio. Your LTV ratio comes from the amount of money you put into the down payment divided by the appraised value of the home. A mortgage lender cares about a high LTV ratio. A borrower will be less likely to walk away from a mortgage if they have a significant amount of money already invested in the home.
Most conventional home mortgages demand an LTV ratio of no more than eighty percent. What can you do if your down payment combined with the property appraisal results in an LTV ratio of greater than eighty percent? The most straightforward fix is to add enough money to your down payment to bring the loan-to-value rate into an acceptable range.
It’s also possible to obtain a high LTV ratio home loan if you pay for private mortgage insurance (PMI). This type of insurance is an additional cost on top of your mortgage payment. It serves to protect the lender if you were to default on the loan. Conventional mortgages usually allow you to stop paying for PMI once the loan-to-value ratio on your home falls below eighty percent.
#3- High debt to income
Do you struggle to pay all your debts each month? You can bet that a lender pays attention to your ability to meet your financial obligations when deciding on your loan application. A lender examines your total monthly income compared to
● The minimum required monthly payments on all your current debts.
● Your proposed monthly mortgage, property tax, and HOA payments.
You might not get a loan if the bank is unsure about your ability to repay it. However, you have the power to improve your loan-approval chances even if you carry a relatively high debt-to-income ratio. Some of the steps you can take to obtain a loan include.
● Paying down your debts.
● Paying off smaller loans.
● Checking into FHA/VA/USDA loan eligibility.
Paying down your debt is a smart idea when you’re about to take on a new mortgage. Check out this Credit Karma article for advice on maintaining a realistic budget after you move into your new home.
Last thoughts
Lastly, when you have your heart set on a particular home, the last thing you want to hear is that your home loan application was not approved. Once you know why your application wasn’t accepted, you can use that information to choose a loan that better fits your circumstances. Fortunately, there are many terrific home loans available to homebuyers, and a high-quality mortgage broker knows how to find one that works for your family.
The loan officers at Strategic Mortgage Solutions specialize in matching our clients with outstanding home loans. Contact us today to discover the fantastic difference that it makes when your loan officer works for you instead of for the lender.
