Reasons For Refusal Of Mortgage Pre-Approval

The first step in purchasing a home is Mortgage Pre-approval. But what happens if your preapproval is turned down?

Though it may be discouraging, it does not necessarily imply that your home-buying ambitions are over. Here’s what went wrong and what you can do to enhance your chances of getting approval in the future.

What Is Mortgage Preapproval and How Does It Work?

A mortgage pre-approval letter is a letter from a lender stating that, based on the financial information you’ve submitted, you’ll most likely qualify for a mortgage loan. The letter will also state the amount of money you may be eligible for.

Every lender’s pre-approval procedure is different. Some may only require basic information such as your name, annual salary, and predicted credit score, while others may require a credit check and extensive financial paperwork.

A pre-approval is not the same as a mortgage approval; it does not imply that the loan will be funded. Preapproval letters are intended to assist you in the home buying process by providing you with a budget and demonstrating to sellers that you are a good candidate for financing.

Why Do Lenders Refuse to Issue Preapproval Letters?

Lenders reject applications for a variety of reasons, but it all boils down to how dangerous of a borrower you are. High debt-to-income (DTI) ratios were the cause of about a third of declined mortgage applications, according to the Consumer Financial Protection Bureau’s (CFPB) examination of 2019 mortgage-application denials.

Poor Credit and collaterals are the grounds for denials from lenders. In 2019, 8.9% of mortgage applications have denied.

Here are some of the variables that may have contributed to your denial:

You Have An Excessive Debt-to-Income Ratio

Your debt-to-income ratio (DTI) measures how much of your monthly income your loans consume, such as school loan payments, credit card bills, and your projected future mortgage payment. According to the CFPB’s investigation, DTI was responsible for about 30% of the refused applications.

Your Credit Record Isn’t Up To Mark

It’s also possible that your credit history played an impact. Lenders look at your payment patterns, how much of your credit limit you’re using, and how many credit cards and loans you have when reviewing your credit history.

Late payments, collections accounts, and a large number of debts could all play a role in your denial. According to the Consumer Financial Protection Bureau, poor credit history was the reason for 19% of refused applications in 2019.

Low Home Value/Bad Collateral

Your home serves as security for your loan. If you don’t pay back your loan, your lender may foreclose on your home and sell it to recoup their losses.

The lender may reject your application if the residence isn’t valuable enough, especially in comparison to the amount you’re asking to borrow. According to the Consumer Financial Protection Bureau, insufficient collateral was the basis for around 14% of all purchase application denials in 2019.

What To Do If You Are Turned Down

If your lender declines your preapproval request, find out why. Obtaining an explanation for your refusal can assist you in identifying the problem (high DTI, low credit ratings, etc.) and devising a strategy to address it:

1. Improve your credit score by paying down credit card balances, clearing any collections accounts, catching up on missing payments, and notifying credit bureaus of any inaccuracies identified on your credit report.
2. Consistency is key: Make sure you pay your payments on time, every time, and that you have a solid job. Both of these things can help you become approved.
3. Pay off your debts: The more debt you can pay off, the lower your DTI will be. Aim for a DTI of less than 43 percent.
4. Create a second source of income: Raising your income can help you lower your DTI. Consider picking up a side gig or asking for a raise, but keep in mind that lenders often look at your income for the last two years when determining your capacity to repay your mortgage.
5. It’s also a good idea to apply to a few different lenders. Because qualifying requirements differ by lender, shopping around can help you increase your chances of getting approved.

Final Thoughts

Your homebuying quest isn’t over just because your preapproval application was declined. You have to find out why the bank refuses your loan. You can take action to address the concerns and make sure to check your report in a regular manner.

A financial or housing consultant can also help you. They can advise you on the best course of action for your specific situation and credit.

Additionally, refer experts from Elite Properties who can assist you in making the right decision. We are a cash buying company that suggests we provide fast closings. Call us at 718-977-5462 today.