Reasons you can't get a mortgage - and how to overcome it

Tony Moton
Reasons you can't get a mortgage - and how to overcome it

No matter how you look at it, getting rejected for a home loan can hurt.

And with the new Dodd-Frank rules in effect, would-be borrowers could find their applications headed to the rejection pile without understanding why.

Concerned about details that could trip you up during the mortgage loan process? If so, here's the lowdown on factors that could cause lenders to deny your application - and what you can do to avoid rejection.

Denial Factor #1: Credit Score Below 640

"If your credit score falls below a particular number, it can prevent you from getting a loan," says Valerie Saunders, president of the Florida Association of Mortgage Professionals. "People with a higher score are presumed to be a lower risk for default, compared to someone with a lower score."

What score presently is the lowest you can have to qualify for a home loan? The number will vary by lender, but if you ask Tim Wilkes, managing member of Magnolia Mortgage Company LLC of Mobile, Alabama, the number is 640.

"Some companies will allow maybe 620, the next benchmark, and some will go to 600 or 580," Wilkes says.

Possible Solution: If your credit score is below 640, lenders may "require a lot of documentation or compensating factors, like more money down or more money in reserves," says Wilkes. Documentation requirements needed to help offset a low credit score could include recent bank statements and proof of sources for deposits, employment check stubs, and all other sources of income.

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Denial Factor #2: Late Payments

People might say "better late than never," but in the eyes of lenders, borrowers who have a history of making late payments are potential candidates for mortgage denial. Lenders, according to Saunders, often associate tardy payments with higher risks for repaying a loan.

"When you fail to pay a debt on time and that creditor notifies [the credit bureaus] that you have gone 30 days or more past the due date, it affects your credit score," Saunders says. "Make sure you pay any outstanding debts you have in a timely matter."

Possible Solution: The best piece of advice for someone with late payments, Saunders says, is getting in the habit of paying creditors on time to re-establish credit. But if you have a late payment that isn't necessarily the result of bad payment habits, Saunders suggests you take the opportunity to explain the situation to lenders.

"Of course, occasionally, a check or bill gets lost in the mail," Saunders says. "If there is a late payment and you can explain it, you should as long as it's a one-time thing. [Lenders] are looking for something that doesn't look like a pattern."

Denial Factor #3: Unstable Income

Having an inconsistent or unstable income could be a prime factor in determining whether your mortgage application gets turned down.

"Obviously, they are looking at whether you can consistently repay a debt," Saunders says. "If you have an income that fluctuates dramatically, they will consider that. But some people have different sorts of income."

Income from stocks, dividends, or annuities, according to Saunders, typically gets close scrutiny from lenders. Ditto for people who are self-employed or are reliant on freelance income, Saunders says.

"If you have a more complicated form of income, be prepared to provide more detailed information about your sources of income," Saunders says. "It's all about documenting."

Possible Solution: "Sometimes, loans can be structured around seasonal income, depending on [the lender] you're dealing with," Saunders says. For example, "If you are a farmer and you earn income based off of harvesting crops at certain times, there are programs available for people who don't have traditional jobs."

For example, the U.S. Department of Agriculture's Farm Service Agency (FSA) reports it often makes loans available to "beginning farmers who cannot qualify for conventional loans because they have insufficient financial resources."

Denial Factor #4: Too Many Expenses

Is the amount of money you spend on a monthly basis pretty close to your income? If that's true, your budget is lacking financial wiggle room and that could be a factor that keeps you from getting a home loan.

Your debt-to-income ratio is a barometer used by lenders to figure out whether you merit getting a mortgage.

The rationale for lenders relying on a borrower's debt-to-income ratio is that it can help protect them from giving loans to people who might not be able to afford their loan payments.

The Dodd-Frank Act, which has established the general requirements for qualified mortgages, now stipulates that consumers must have a debt-to-income ratio that is less than or equal to 43 percent, as of January 10, 2014.

Possible Solution: Saunders says some federal loan programs might allow an applicant's debt-to-income ratio to exceed 43 percent - all the way up to 50 percent - but home loans of this nature could involve higher interest rates and fees.

Denial Factor #5: New Job

People who bounce around from job to job or have inconsistent employment could find lenders frowning at their applications.

"[Lenders] want to see a consistency in your employment," Saunders says. "You should be with your employer for two years."

Saunders adds that applicants who have changed career fields in the past year could find themselves in the denial zone.

"If you go from one retail job to another one, that might be fine," Saunders says. "But if you go from retail to becoming a pharmacist six months later, [lenders] might recommend that you have a longer job history than you currently have."

Saunders says switching jobs during the loan process might also turn out to be a bad move.

"They will be doing verbal verifications," Saunders says. "If they find out a person no longer works somewhere, that pretty much can be it. A lot of it has to do with stability."

Possible Solution: One way to potentially avoid problems with job changes is to have new and former employers confirm your employment and salary in writing, and giving the information to the lender.