Summary: Finding that perfect home in Washington state has its challenges. And getting denied for a mortgage is a discouraging experience. We’ve put together 7 reasons common reasons why mortgage applications are denied. In this blog post, we cover:
- Low credit scores
- Large deposits without an explanation
- Increasing debt or over-drafting a checking account
- Job change or inconsistent job history
- Debt to income ratio isn’t low enough
- Not staying up to date on your taxes
- The appraisal is less than the selling price
Purchasing a home in Washington state is an exciting process and often a new phase of life. You have spent months searching for your perfect PNW home and have found the house you want to purchase. You are ready to move into the home of your dreams.
Unfortunately, you have found out that your request for a mortgage has been denied. This can be a deflating experience. Fortunately, there are ways to avoid this by understanding the most common reasons why a buyer is denied for a loan. Here are common reasons why homebuyers are denied a home mortgage in Washington state.
#1. Low credit score
Your credit score is an important factor in the approval process. Your credit score determines your mortgage interest rate and a lender uses it to assess how much of a risk you are in paying back the loan. If your credit score is low or does not meet the minimum credit score for the particular loan program a lender will consider you too much of a risk and deny the loan application.
Actions that can lower your credit score, such as opening new lines of credit, personal loans, or missing bill payments can hinder the approval process because of the lower your credit score, the higher the risk you are to the lender.
Make sure you know your credit score before you apply for home financing. There are three credit bureaus that you can use to find your FICO credit score; those are Experian, TransUnion, and Equifax. Look over your credit report for accuracy and take action to make any needed corrections or improvements.
#2. Large Deposits
With high home prices in Washington state, receiving gift funds for your down payment are great! However, large deposits into your bank account that are not specifically identified such as a payroll deposit will need an explanation of their source. Without a gift letter from that family member explaining the purpose and intention of the funds, any large deposits look suspicious to a loan processor and could make you appear as a risk to the lender. Funds for a down payment are required to come from an acceptable source. Acceptable sources for a down payment include the sale of your own assets like stocks or mutual funds, borrowing from a secured line of credit such as a Home Equity Line of Credit, Margin Loan or 401k loan or gift funds from a family member. Gifts are generally only allowed when purchasing a primary residence or second home. You cannot use gift funds to purchase and investment property on most loan programs. Gifts must also come from a close family member or other legitimate close relationship. Unacceptable sources of down payment include borrowers from an unsecured source like a credit card or signature loan, undocumentable cash deposits and large transfers from unknown sources.
#3. Increasing debt or over-drafting a checking account
Purchasing a home can be thrilling and a monumental life moment, and often times the next step in homeownership is to purchase home décor, furniture, or to start planning home improvements. It may be difficult to resist the urge, however making these major purchases or increasing the balances on your credit cards can be damaging during the home financing process. Your home loan application serves as a snapshot of your financial picture and you don’t want to do anything that could change that picture during the transaction process.
To a lender, over-drafting from your checking account could mean that you are a risk for paying back what you borrowed or could eventually cause your credit score to decrease and prevent you from getting approved.
#4. Job change or inconsistent job history
When you take out a loan, the lender needs to know that this will be repaid. This depends on you having a steady stream of income from your job.
If you decide to change jobs between the time of pre-approval and the time of purchase, your employment history and income stream do not mean as much. While changing employment doesn’t always cause an issue there are situations that can definitely cause problems. Changing jobs within the same field is fine assuming you are a salaried employee. Switching jobs can cause issues when any of the following are involved: commission income, bonus income, contract or temporary employment, 1099 employment or self-employment. With all of these situations, a history of income is required to verify future income expectations and meet the government’s Ability to Repay guidelines.
#5. Debt to income ratio isn’t low enough
Besides the amount you have saved up for a down payment, loan processors will also look at the amount of debt you have compared to your income in Washington state. This is called your debt to income ratio (DTI). Currently on conventional, FHA and VA loan programs, you can often get approved with ratios as high as 50% with compensating factors; however, on jumbo and non-conforming loans you can expect the maximum accepted debt to income ratio to be 43%. If your DTI is higher than this you will most likely be denied mortgage financing.
To improve your DTI, pay down any debt you may have on student loans, car payments, or credit card debt, etc. before applying for a home loan. To calculate your debt to income ratio, add up all of your monthly debt payments, such as student loan or car payments and divide that number by your gross monthly income. Before paying down debt to qualify it is vital you coordinate with an experienced Loan Officer who can review your situation and advise on what steps to take to qualify.
#6. Not staying up to date on your taxes
Make sure you are up to date with your income taxes. Home loan lenders typically look for one-two years of personal tax returns, business tax returns if you own your own business, or W-2s or 1099s. Your income taxes will help determine how much you can afford now and through the life of the loan so not staying up to date with your income taxes can be detrimental in your loan edibility. If you haven’t filed tax returns this can cause major issues during the income validation process even if you are initially pre-approved for a loan. If you haven’t filed make sure you communicate this early in the pre-approval process so issues don’t arise after you have a property under contract with earnest money deposited.
#7. The Appraisal is less than the selling price
Sometimes getting denied a mortgage is out of your control. If the home that you are interested in purchasing is appraised at a price that is lower than the selling price or the amount that you are asking to borrow, the lender doesn’t see the home value as sufficient to support the amount that is being borrowed and will most likely deny your application. Options in this situation are to negotiate with the seller to lower the purchase price or put more money down to compensate for the low value. Mortgage Lenders will base the down payment percentage on the lower of the sales price or appraised value.
Mortgage Denials are Frustrating
It is frustrating to have your request for a loan denied. Fortunately, understanding these common reasons can help you avoid this deflating experience or there are steps you can take after being denied a mortgage. Think about all of these possible scenarios when you apply for a home loan. And rely on the expertise of your trusted home mortgage professionals at Sammamish Mortgage.
If you have any questions or think you may be ready for a place of your own, check out our homebuyer guide and contact us today! We have been part of the mortgage industry since 1992 and currently lend in all of Washington, Oregon, Idaho, and Colorado and offer a wide variety of mortgage programs and tools with flexible qualification criteria.
