Why Mortgage Lenders are Turning You Down

Low interest rates are one of the main factors fueling this spring’s robust housing market. And in contrast to recent years when it was difficult to borrow money, 51 percent of people now say that it’s getting easier to land a mortgage, according to a recent housing survey by Fannie Mae.

So if you’re not amongst those hearing “yes” from lenders, why are you being turned down for a mortgage? Here, the top reasons.

Credit score

To put it bluntly, if you have a score less than 620, you’re going to have a very hard time finding financing. That’s because your credit score is the broadest measure of your creditworthiness. It summarizes how you handle your finances—and a low one indicates that you don’t do so in a responsible manner.

Late payments

In addition to looking at your credit score, a lender is going to examine your credit history to see if there are any other issues that would indicate you’re a risky borrower. “Lenders are typically looking into how you’ve managed your finances for the past two years,” says Tony Wahl, a mortgage and lending expert for Credit Sesame. “One late payment may not hurt you, but if you have a pattern of being late, or have an account that you can’t get caught up on, that’s going to be considered high risk for a mortgage lender,” he explains. So it’s vital that you stay up-to-date on all credit card and loan payments.

Debt-to-income ratio

This ratio is the percentage of your monthly take-home salary that goes to pay off debt. Ideally, lenders like to see only 33 percent of your income going towards housing costs and no more than 38 percent total towards your debt (car loans, credit-card payments). If your debt-to-income ratio reaches 45%, lenders might give you a mortgage—but only if you have good credit and have socked money away in the bank.

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Employment status

“Lenders want to see a solvent, stable two years of employment,” says Wahl. So if you don’t hold a job, have been in and out of work, or have long gaps of unemployment, you could be designated a credit risk and that could be reason for denial.

Derogatory financial events

Bankruptcies and foreclosures are a black stain on your credit history. In order to recover, you’ll typically need to rebuild your credit by being a financially responsible individual for at least two years.

Loan-to-value ratio

This percentage expresses the amount of the loan in relation to the value of the property. And if you’re underwater but looking to refinance, this ratio could prevent that. “Lenders want borrowers to have equity,” Wahl explains.