Buying a home is the American dream. And, if you’re like most, you’ll probably have to obtain a home loan to make that dream come true. However, many factors can affect your home loan approval. Here is a list of some of the reasons your loan may not be approved.
Your credit history is perhaps the largest obstacle to overcome when it comes to home loan approval as it carries the most weight in determining your credit future. Financial institutions that lend mortgage loans look for the following as potential reasons to decline your home loan approval:
Previous foreclosures or bankruptcies
Large amounts of outstanding credit card debts
Your best bet is to pay off your outstanding debts and establish a solid, recent history of on-time payments. While you can’t remove the negatives on your credit history, you can show good faith efforts to improve. Credit card use is fine but don’t overdo it, try to keep outstanding credit card balances to 35% or less of the credit limit for each card. That will resonate with lenders as well – over time.
Debt to Income Ratio
No matter how good your credit is, lenders also want to feel confident that you can reasonably pay any new debts you take on. That’s why they explore your debt vs. your income to determine if they believe you can afford to take on the burden of additional financial obligations and repayments.
Lenders determine this by adding up all your monthly debts and dividing those by your monthly gross income (your income before taxes, insurance, 401k and other items are deducted). If this ratio does not meet their criteria for approval, your loan could be denied. While each lender will have their own cutoff points, ideally, you want this ratio to be below 40 percent; the lower, the better.
Most home loans require at least some money as a down payment. While there may be a few programs that offer zero-down mortgages, it is recommended that you put at least some money down on your home. The more you can put down, the better the odds that you’ll not only be approved for the loan, but you may also qualify for a lower interest rate.
Twenty percent of the home price is usually the standard amount of down payment you’ll need. If you’re having trouble coming up with a 20 percent down payment for your mortgage, consider specialized loan programs offering down payment assistance or allowing you to purchase with lower down payments and private mortgage insurance.
Now that you’ve found the home of your dreams, it’s time to have an appraisal. If the estimate comes back lower than the asking price for the home, you could have problems. There are some options available to you if this occurs, such as coming up with the difference between the appraised value and the loan value yourself or asking the seller to reduce the price to reflect the home’s appraised value.
Buying a home is an exciting time that can quickly turn confusing. Our home loan experts are here to guide you through the entire process and help you make the best financial decisions for you and your family.
To learn more about home loans or to receive answers to your mortgage questions, please stop by your local branch or give us a call at (248) 745-3353.
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