Millions of people apply for mortgages each year, but not everyone who applies for a mortgage gets one. So how can you increase your chances of approval instead of receiving a denial letter from your lender?
Homeownership remains a large part of the American dream. Millions of people apply for mortgages each year to make that dream a reality. But not everyone who applies for a mortgage gets one. In fact, about 12 percent of those who applied for a mortgage in 2015 were denied, according to data from the Home Mortgage Disclosure Act.
So how can you avoid receiving a heartbreaking denial letter from your lender? Plan ahead, says Karry Lewis, Vice President and Manager of Mortgage Production Administration for Regions Bank.
“You can’t just wake up one day and say, ‘I’m going to buy a home today.’ You need to prepare,” he says. Fortunately, you may be more prepared than you think.
Preparing to Apply for a Loan
In addition to preparing all the necessary paperwork, you need to have your financial house in order long before your home search begins. Generally, lenders are going to look at a few things before making their decision: credit history, the amount of debt you have, income stability, and down payment amount.
Missing payments, having a short credit history, owing a large amount of debt and lacking a steady income are a few examples of situations that can impact your credit score.
“You don’t have to have perfect credit to get approved, but your repayment history tells lenders a story,” Lewis says. “It tells them how important your credit obligations are to you, and that can drive their decision.”
However, it’s important to remember that no single application is the same, so your lender may handle individual circumstances and challenges on a case-by-case basis.
Improving your credit could take some time, possibly a year or longer, says Lewis. He recommends seeking guidance from a credit-counseling agency if you’re not sure where to begin. You can also check your free annual credit report to check for any errors affecting your score.
What Loan Options Are Available to Me, and What Are The Qualifications?
If you want to apply for a Federal Housing Administration loan, a popular government-backed loan with a higher rate of loan approvals, you are required to have a minimum FICO score of 580 to qualify for a loan with a 3.5 percent down payment. If your credit score is below 580, however, you may need to pay a 10 percent down payment, according to the Federal Housing Administration. And for those with a score of 500 or lower, consider speaking with a trusted advisor or financial professional, as this score is considered ineligible for a loan amount. Additional requirements for this government loan include proving that you have had a steady employment history for the past two years.
Lenders, in general, will also be looking at your income stability, which is not the same as job stability, Lewis notes. Having a good credit score and credit history makes it easier to qualify for all types of mortgage loans.
“We want to see that you have a history of income that is stable or increasing over time,” he says. “It doesn’t matter if you’ve worked multiple jobs over that same time period, like a year here or a year there, just that your income is stable or increasing.”
For any loan in general, lenders will want to see your income over the last 24 months. And they want to make sure that you make enough to comfortably cover your debt obligations and won’t be overextended by your new mortgage payment. Your debt-to-income ratio, in most cases, should not exceed 43 percent. To determine your debt-to-income ratio, add up all your monthly debt payments and divide them by your gross monthly income.
Your down payment will vary depending on your lender and the specific loan product you’re seeking, but it might not need to be as much as you think.
“You don’t have to put 20 percent down anymore,” Lewis says. “There are lenders that offer no down payment programs, and many only require 3 percent or 5 percent today.” Although, putting 20 percent down usually eliminates the expense of mortgage insurance and makes it easier to build equity.
If At First You Don’t Succeed, Try, Try Again.
A denial now doesn’t mean you can’t get a mortgage in the future. Talk to the lender about why you were denied, and start working to make corrections: repair your credit, pay down debt, increase your income, or save more money.
“The goal is to know exactly why you were denied, create a plan, execute the plan, and try again when you’re ready,” Lewis says.
No matter the type of loan you choose to apply for, it’s important to meet with a trusted financial advisor or banker to help answer any questions you may have regarding rates or the application process.
With the basics of applying for a loan covered, the next step is getting started. Visit regions.com/insights for more information on qualifying for a mortgage.
Lenders often refer to “The Four C’s” of mortgage lending. It’s a quick and simple breakdown of what they’re looking for in applicants:
- Credit: Your record of paying bills and debts on time
- Capital: Your money, savings and assets
- Collateral: The value of the home you want to buy
Capacity: Your current and future ability to pay back the loan
