Mortgage lending is a lucrative business in Utah. An average home loan in America is paid off just a little over eight years since the day it was consummated. And the interest collected during this period is high enough to render a fully amortized, fixed-rate mortgage in Ogden, Harrisville, or Pleasant View profitable.
You might think that lenders are dying to approve as many loans as possible. It is correct and incorrect. Yes, many mortgage lenders favor quantity more over quality to make money. However, most of them have learned their lesson in the Great Recession.
To help avoid another real estate market crash, the majority of mortgage lenders are selective in choosing borrowers. If you barely meet the basic requirements set forth by government agencies and government-sponsored enterprises, a conservative lender will reject you.
There are dozens of reasons why a mortgage application is denied, and here are the top ones:
High Debt-to-Income Ratio
Most lenders will scrutinize your levels of debt and income. One is not necessarily more important than the other. In theory, having a six-digit salary in the United States does not automatically render you a qualified homeowner.
To gauge your actual financial capacity to repay a mortgage for up to 30 years, you need to calculate your debt-to-income (DTI) ratio. You can do math by dividing your gross monthly income by all of your liabilities.
Ideally, most lenders would want to see your front-end DTI ratio, the ratio that does not include your projected mortgage payment, to be at 28%. An acceptable back-end DTI ratio, the one that provides for your project mortgage payment, is 36% in general.
According to CNBC, the median salary of Americans is $56,516, but the median personal income in the country is $38,000, excluding home loans. In other words, the likely front-end DTI ratio of a person in the United States is 67%, which is way above the threshold.
It is imperative to aim for the maximum front-end and back-end DTI ratios observed by most lenders. As you try to boost your income, you should also make every effort to pay off most of your financial obligations before you apply for a mortgage.
Mortgage interests will predict your likelihood to default on a home loan using your past. Freddie Mac and Fannie Mae, the biggest mortgage buyers in the United States, refuse to purchase mortgages loaned to individuals with a FICO score below 620.
To qualify for most mortgages in the United States, strive to have good credit before your application. Based on the latest FICO credit scoring models, having a score of 670 suffices to join the “good credit” club.
Borrowing funds to buy a house that is worth less than what it is listed is another reason why your prospective lender might turn down your mortgage application. Usually, an appraisal is done to determine a property’s value at the time of mortgage origination.
To avoid collateral-related loan rejections, look for a lender that does not require an appraisal. You might want to use your appraiser, too. Also, it might pay to stay away from old listed houses, for their advertised prices might no longer be accurate.
Many homebuyers overestimate their capacity to maintain mortgage payments, and some mortgage lenders are too greedy not to reject underqualified individuals to make bank. Strict home loan criteria are not perfect, but so do most borrowers and lenders. Avoid the temptation of exploiting any loopholes because the rules exist for the benefit of everyone.