Why was my loan declined?

Real Estate Agent with Keller Williams Realty CalBRE# 01308620

Why was my loan declined? No prospective home buyer wants to hear the words "We regret to inform you..." Unfortunately, according to federal data more than two million people in the US heard those ill fated words! Why? For a variety of reasons ranging from just not meeting certain lender requirements or because they didn't fill out the applications properly or completely. That number doesn't even include all the people who abandoned the process all together! The Mortgage Bankers Association estimate that about half the people who try to refinance and 30 percent of buyers are either declined financing or they drop out before reaching the closing! 

Underwriters have been tightening up their guidelines for several years now, some even tighter than federal guidelines! 

Why was my mortgage declined you ask? According to industry experts the following 6 triggers are topping the charts for mortgage declines:

BAD CREDIT - Most lenders draw the line at a FICO score of 620 or below. Late payments on a current mortgage within the past 24 months is a big no no too. Approximately 1/3 of all Americans have credit scores too low to obtain a mortgage. Sometimes a credt score starts out high enough to be approved but the buyer makes purchases or does something to decrease their FICO during the loan process resulting in a decline.

LOW APPRAISAL -  The appraisal is a HUGE factor in loan denials in today's market. The HVCC code which governs the way in which appraisals are ordered has had a big negative impact on the real estate market. Appraisers are the eyes & ears for the banks and they have been put under a microscope in recent years causing much more conservative appraised values and killing many real estate transactions! 

PROPERTY PROBLEMS - The property itself must qualify for the loan too! If there are any health & safety issues, the banks will usually call for repairs before the application can be approved. This causes a big problem in many transactions especially shortsales & forecolures where the bank or the Seller is unwilling to pay for repairs & the buyer is then forced to choose to spend money fixing a problem on a property that they do not yet own or walk away from the transaction all together! In California, if a property has an HOA and the association has more than 15% delinquency or less than a 51% owner occupancy, then financing will most likely be denied. 

INSUFFICIENT INCOME - Gone are the days where you could get financing on a home you really cannot afford! Lenders want to make sure you can afford to make your mortgage payments. Any gap in employment is a red flag for underwriters who typically like to see solid employment history for at least the past two years. if you $50,000 you need not apply for a $700,000 mortgage unless you have some sort of trust fund that pays you regularly! 

CLOUDY FINANCIAL PICTURE -  A borrower's total monthly payments cannot exceed 45-50% of their total montly income. This is called the DTI (debt to income ratio). Your ratio better not be clouding your financial picture if you plan on obtaining a mortgage. Get rid of as many monthly expenses as possible prior to applying for a loan! 

INFORMATION MIX-UPS -  A substancial amount of loans are declined due to unverifiable information. Lenders are much more careful now, verifying everything like the owner occupancy, jobs, income, bank account activity, etc...if you're not being truthful on a loan application, you can expect to be found out and declined. 

Now you know....Why was my mortgage declined? 




Comments (8)

Doug Bullwinkel
Envoy Mortgage,NMLS ID 6666 - Sacramento, CA
Mortgage Loan Originator NMLS #281609

Your points are very true for the potential red flags that can cause a mortgage application to be declined.  Thanks for the post.

Oct 13, 2011 08:38 PM
Emily Rose Newmark - Keller Williams Realty

Thanks for reading Doug! 

Oct 13, 2011 08:40 PM
Emily Rose Newmark - Keller Williams Realty

Thanks for reading Doug! 

Oct 13, 2011 08:41 PM
Valarie Swanson
CENTURY 21 Award - San Diego, CA
San Diego Real Estate

Emily, so true. What I think is funny is that these are the exact same points my husband and I were told when we went to buy a house in 1993. Thing is, the way the market operated was unrealistic in recent years. Traditionally, this is how you buy a house. It's just common sense (maybe with the exception of the appraisal).

Oct 13, 2011 08:49 PM
MichelleCherie Carr Crowe .Just Call. 408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

Yes, it's just hard when people truly want a home and can't get it.

Oct 13, 2011 09:02 PM
Patrick White
Home Driven Realty, Inc - Baldwin, NY
Driven to bring New Yorkers home

Good Morning Emily

Thanks for the post. Have a great day

Oct 13, 2011 10:00 PM
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Most of this things you list should be discovered before or during the application process. In some cases, issues can be corrected during the application process. Often a client can be coach fix stuff even before the application. The appraisal another issue, this one is tough for many,

Oct 13, 2011 11:05 PM
Emily Rose Newmark
Keller Williams Realty - Sherman Oaks, CA
I agree, the combination of a good loan officer & real estate agent will help you avoid all of the issues above minus appraisal. As a realtor, when I see property conditions I know will effect a Buyer's ability to obtain financing I steer my clients away from that home. When selling homes/condos with an HOA I always contact the HOA 1st to make sure try meet the minimum financing requirements before writing an offer or even showing sometimes! Saves my clients & I a lot of time & stress in the long run! - Emily Rose Newmark Keller Williams Realty - Sherman Oaks, CA
Oct 14, 2011 03:01 AM