Three Common Reasons a Home Mortgage Loan is Denied

Before applying for a home mortgage loan it is important to anticipate the reasons why you may be denied a loan so you can prevent denial from happening. While there are many reasons a home mortgage loan can be denied, there are three common reasons that occur most often. The good thing is that all three of these reasons can be fixed over time. Here are three reasons your home mortgage loan may be denied and ways to fix them so your loan will be stamped approved.

Insufficient Down Payment

Traditionally, lenders required a 20% down payment on home loans but as homes escalated in price, lenders allowed buyers to pay down less as long as they carried private mortgage insurance. Even today, with lenders tightening up on home loans because of the struggling economy, there are ways to make a low down payment of 3% to 5% if you are a good risk and carry mortgage insurance. If you do not have enough to cover the required down payment and your loan has been denied, you can always wait another year or more and save money for a down payment. Remember, a higher down payment means you own more equity in your home and your monthly payments will be lower. It may be worth it to you in the long run to wait that extra time and save more for a down payment.

You have Excessive Debt

With the average American holding 8 credit cards totaling nearly $10,000 in credit card debt, it isn't surprising that people are being denied home mortgage loans. If you carry high credit card balances, car loans, college loans or any other types of loans that add up to a sufficient amount of money, even if you have a good credit score, you will have trouble getting a mortgage loan. On average, lenders won't risk loaning money to a person who pays more than 40% of their gross income in fixed loans and minimum payments on credit cards including the expected mortgage payment you are applying for. (Click here to calculate debt/income ratio.) If your debt is high, pay it down before trying to apply for a home mortgage loan.

A Low Credit Score

A low credit score can make getting a home mortgage loan harder and can cost you more money in the long run. Even if you can obtain a loan with a low score, your will pay a higher interest rate on the loan because you are considered a high risk. If your credit score is 720 or lower, you will have a harder time getting a mortgage loan. Instead of being denied or penalized for a low score, take the time to build up your score before applying for a home mortgage loan. Ways to improve your credit score are to pay all bills on time, lower the balances you owe on credit cards and never bounce checks. Having a higher credit score will pay off in the long run with a lower interest rate on your mortgage loan.

Try fixing these three common loan problems before applying for your home mortgage loan so you will be ahead of the game. If you have money saved, have paid down your debt and have built up your credit score, your chances of getting a home loan are much higher. Be prepared by knowing these three common problems and you may get the home of your dreams the first time around.