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Submitting your first mortgage application or applying for pre-approval for a home loan is just the first step on what can sometimes be a long, winding journey to homeownership.
Once you complete and submit the application, you are now at the mercy of the loan underwriters, who are responsible for digging into all the details of your financial life and home ownership. These underwriters will usually never know or see you in person, but will rely primarily on the documents you submit.
If the mortgage underwriting shows red flags, your application could be rejected. So find out what underwriters are looking for and how you can avoid triggering a rejection.
What does an underwriter do?
A mortgage underwriter is the person responsible for making the final call on your mortgage approval. They assess all of the documents associated with your application and help the lender determine if you qualify for a loan. This includes fetching your credit reports, ordering a home appraisal, verifying your income, employment and assets, and double checking the source of your down payment.
If there are any questions or additional information needed, the underwriter will work with you and your lender to put together everything that will allow you to make a final decision.
How long does the subscription take?
Taking out a loan is usually the longest part of the mortgage process. Typically, it takes about 30 to 45 days from the start of the subscription to the close of the loan. However, this timeline can be affected by a number of factors including the complexity of your financial situation, the need for additional documentation, and the number of loan applications currently on the lender’s base.
Other key factors in selling the home, such as whether the appraisal is too low, whether repairs are needed before closing the sale, or whether sellers need more time before moving to a new home, can also delay mortgage processing.
How often does an insurer refuse a loan?
If you’ve been turned down for a mortgage in the past, don’t feel too bad. It happens quite often. In 2019, about 8% of applications for single family homes built on site were rejected. Keep in mind that after the pandemic, this number may be even higher as many lenders have tightened their qualifying standards.
Whether you’ve been turned down in the past or want to avoid this situation when applying, the key is to understand why an insurer might reject a mortgage application and avoid these issues when you apply.
Reasons for being rejected by an insurer
Here’s a closer look at the most common reasons a loan insurer will reject a mortgage application.
One of the main factors that a mortgage insurer will assess is your credit history and your score. Your creditworthiness determines the extent of risk you pose to potential lenders. A good credit score means you are likely to pay off your loan on time, while a few hits means you could end up missing payments or even default.
This means that your credit score will play an important role in whether or not a mortgage is approved. Although it is possible to qualify for some government guaranteed mortgages with a credit score as low as 500, most conventional lenders require a score of at least 620. However, a score of 740 or higher is preferable and will help you get the lowest score. available interest rate.
Even if your credit score is in good shape, there are some negative events in your credit history that might give the underwriter pause. For example, if you had an account in collection or if you had filed for bankruptcy in the past, the underwriter might not approve the loan.
Also, keep in mind that while your credit was good when you applied for your mortgage, any damage to your score that occurs while you are under underwriting could result in a denial. So make sure you keep track of all your payments and don’t make sudden moves, like applying for a car loan or a new credit card, or closing a credit card until the mortgage is approved.
High debt-to-income ratio
Another important factor that mortgage underwriters take into account is your debt-to-income ratio (DTI). This is a measure of how much of your gross monthly income is spent on debt repayment, expressed as a percentage.
For example, suppose you earn $ 5,000 per month before tax deduction. You have a $ 150 credit card payment, a $ 300 car loan payment, and a $ 550 student loan payment due each month. This would give you a DTI of 20% (total monthly debt of $ 1,000 divided by gross monthly income of $ 5,000).
Most lenders require your DTI to be less than 43% when they include all of your debts, plus the mortgage amount, compared to your monthly gross income. If your debt exceeds that amount, they probably won’t approve you for a mortgage.
Unstable work history
Lenders want to know that you have stable income to fund your mortgage payments. Insurers will therefore dig into your employment history and ensure that you have a reliable job for several months or up to two years, depending on whether you are an employee or self-employed. employee.
Certain situations may result in your mortgage application being rejected, including layoff or recent job changes, especially if you change fields. If you’ve changed jobs recently, it may be helpful to include a letter from your employer confirming your position and salary.
Your sources of income are also important. If a good portion of your income is from commissions, bonuses, or other sources outside of a regular salary, this could signal the underwriter that your income is unstable and may require a longer proof of income period. . It could also result in your mortgage application being denied.
No trace of paper
When it comes to your income, assets and down payment, underwriters expect to see detailed records of where the money is coming from. For example, you will need to provide W-2s from the past two to three years and pay stubs from at least the past 30 days that prove you are employed and verify what you stated in your application.
You will also need statements showing your bank account and your investment balances. If you received some or all of the money for your down payment, you will need a gift letter that explains where the funds are coming from and confirms that it is indeed a gift, and not a loan (which is not allowed).
Along with your personal financial situation, insurers will also take a close look at the condition and value of the property you are purchasing. A significant number is the estimated market value of the house. Lenders don’t want you to borrow more than the value of a house; if you have to sell the property at some point, it’s important to have enough money to pay off the mortgage.
This may be acceptable if the assessment is slightly lower than expected. But if the appraised value is much less than what you plan to pay for the property, there’s a good chance your mortgage application will be rejected, or you’ll have to pay the difference out of pocket.
Problems with ownership
If you are looking to buy a home to renovate, keep in mind that some lenders require the property to meet certain standards in order to get financing. Some loans, such as Federal Housing Administration (FHA) loans, come with a set of specific property standards for safety, security, and soundness that must be met to qualify. So if the home inspection report you’re considering comes back with roofing or electrical issues, for example, you could be turned down for a mortgage.
Next steps after a rejection
If you’ve recently gone through the mortgage application process and a loan was turned down, it’s important to know why. Your lender is legally required to explain the reason for the rejection of your loan application, which will be detailed in a disclosure letter. If you don’t understand the reasoning behind the letter, contact your lender for a more in-depth explanation.
Once you understand the reason (s) your request was rejected, you can work to resolve the issue. Here are some steps you can take to remedy common problems:
- Improve your credit. If you have been turned down for a mortgage because of a low credit score or negative scores on your credit reports, it’s important to clean up your credit before you reapply. Start by checking your credit score and get a free copy of every credit report on AnnualCreditReport.com. Review them for mistakes that could lower your score and dispute any mistakes you find.
- Pay off certain debts. Spend the next few months paying all of your bills on time (payment history is 35% of your score) and paying off any revolving debt. Once your credit score has returned to the “right” range, it should be easier to get approved.
- Lower your DTI. Reducing your outstanding balances will not only improve your credit score, but also lower your DTI. Ideally, your monthly DTI should be less than 36% and not more than 43% including the mortgage balance. So if you have credit cards or loans that are consuming too much of your income, try to get rid of those debts before you take out a mortgage.
- Increase savings. If you were turned down for a mortgage because you didn’t have enough down payment or you didn’t have enough assets to support the loan, it’s important to build up your savings. Having more money in the bank will make you a less risky borrower in the eyes of the underwriter. In addition, you may be eligible for a larger loan and / or a lower rate.
- Choose another property. If there are issues with the home you intend to buy, such as an inflated sale price or damage that is costly to repair, it may be time to look to another home. It can be hard to let go if you’ve found a property that you really loved, but you’ll likely find yourself better off financially by choosing a home that’s easier to finance.