Home loan denials happen, but it doesn’t mean you’ll never be able to buy a home. A lender may not have approved your loan for a variety of reasons. The key to success is knowing why something is happening and what you can do to fix it.
Check out our five probable reasons for a home loan denial. Also, find out what you can do to secure loan approval on your next mortgage application.
1. Low Appraisal
If the property’s appraised value is much less than the purchase price, the loan-to-value ratio (LTV) may be greater than the lender may legally allow.
Potential solution: Property value difficulties, while difficult to fix, is not insurmountable. Try renegotiating if the purchase price exceeds the neighbourhood’s house prices. Make a greater down payment and accept the lesser loan amount if you have the financial resources to do so. Unfortunately, depending on the market, you won’t be able to shop lenders to see if you can get more money. The chances of the house remaining on the market are small. As a result, you might think about renegotiating or making a larger down payment.
2. Poor Credit History
A low credit score often results from not making payments on time, carrying a high balance, or maxing out credit cards. Any of these things can impact your score and make it difficult to qualify for a mortgage.
Potential solution: The first step is to get a copy of your credit report and check for any errors. If there are any, you’ll want to dispute them right away. If everything looks accurate, you may need to take some time to improve your score before applying for a home loan again. This can be done by paying all bills on time, keeping balances low on your credit cards, and only opening new accounts when necessary.
3. Inadequate Employment History
Lenders like to see a steady employment history because it’s an indicator of future earnings potential. So, if you recently switched jobs or are self-employed, you may have a more difficult time qualifying for a loan.
Potential solution: The best way to overcome this issue is by waiting to apply for a mortgage until you’ve been with your current employer for at least two years. If you are self-employed, be prepared to provide additional documentation, such as tax returns and financial statements, to prove your income.
4. Lack of Downpayment
One of the biggest reasons people are denied a home loan is that they don’t have enough saved for a down payment. Most lenders require a down payment of at least 3-5% of the purchase price.
Potential solution: The best way to overcome this issue is by saving up for a larger down payment. You may want to consider setting up a separate savings account and automated transfers to make saving easier. Another option is to look into government-backed loans, like an FHA loan, which only requires a 3.5% down payment.
5. High Debt-Debt-to-income (DTI)
Debt-Debt-to-income is a ratio that looks at how much of your monthly income is going towards debt payments. A high DTI can make it difficult to qualify for a loan because it indicates you may have difficulty making your mortgage payments.
Potential solution: The best way to lower your DTI is by paying down your debts, which can include credit cards, car loans, and student loans. You may also want to consider waiting to apply for a mortgage until you’ve been with your current employer for at least two years, which will give you time to save up and pay down debt.
There are several reasons why your home loan application may be denied. But, don’t despair! In many cases, there are things you can do to improve your chances of being approved the next time around.
If you’re looking to apply for a mortgage, you need to find an agent that you can trust throughout the process. Ottawa Mortgage Services is the perfect partner to help you get that mortgage that suits your needs and your budget. Our team actively deals with lenders and negotiates all aspects of mortgage underwriting to ensure you get exactly what you need for your loan. Apply now and get a free assessment from a professional mortgage agent.