5 Reason Why The Lender Turned You Down - Alternative Solutions

Being turned down for a mortgage loan can be frustrating. It wastes your time, wastes your money and it even hurts your credit. But to make matters worse, you may not even know why you were rejected for a mortgage. To help save you from heartache and headache, we’ve compiled a list of the top 5 reasons why you may be turned down by a mortgage lender and alternatives to explore if that happens.

1. Too Low Debt to Income Ratio

Your debt to income ratio is your total monthly debt obligations (credit card payments, student loans, alimony) divided by your gross monthly income. Private lenders prefer that your debt to income ratio is below 36 percent and that your home expenses are less than 28 percent of your monthly gross income. If this is why you are rejected for a home mortgage loan, you may want to consider trying to finance a less expensive house, paying down or consolidating your debt or looking into an FHA mortgage loan, which allows debt-to-income ratios up to 41 percent.

2. Bad Credit

The golden age of subprime mortgage loans is over, and private mortgage lenders are extra careful about giving out mortgages to those with low credit scores. Your typical local bank or credit union won’t back you if you have bad credit, but you may want to look for a bad credit mortgage lender. But a better bet is to try to improve your credit score, since you’ll pay higher interest rates and have more stringent terms if you pursue a bad credit mortgage. Alternative mortgage types, such as adjustable rate mortgages and balloon mortgages may also be an option.

3. Insufficient Employment History

Mortgage lenders take a close look at your employment history, and will shy away if it looks like you can’t hold a job, or if your income looks unsteady. This is particularly problematic for small business owners and self-employed workers, who may not have W-2s or other verified documents to back up their earning power. If you have an irregular work history, you may want to consider a self-certified mortgage.

4. Low Loan-to-Value Ratio

Once upon a time, it was common practice to finance beyond the value of the home. That’s because real estate prices had historically risen steadily, and both the lender and the borrower expected to make their money back over time. But with the recent fallout in the housing market, this isn’t as sure as a bet. Now, lenders prefer that you finance no more than 75 percent of the value of the home, which means plunking down a 25 percent down payment at the very least. If you can’t afford that big chunk of change, you can either opt for a cheaper house or get a “piggyback loan,” which will also help you avoid private mortgage insurance.

5. Lender Policies

Mortgage lenders are not created equally. Some are more risk averse than others and some are better equipped to take on unconventional or subprime borrowers than the next bank or credit union. If you get denied by one bank, it may be just because you broke some threshold that’s built into their internal approval process. So, it pays to shop around for different mortgage lenders. Whereas one mortgage lender may look at your file and say, “No way, Jose!” another may look at the exact same data and say, “You’re approved!” Explore your options.