What makes a borrower worthy of home loan approval? A history of on-time payments, a low debt ratio, and good credit scores all work together to get you home loan approval. But what gets you denied a mortgage?
Reasons For An FHA Loan Rejection
Your lender is required justify approving a home loan. There are three things the lender will review (among others):
- Verify that you have sufficient income for the monthly mortgage obligation;
- Determine that the borrower can afford existing debt and the new mortgage payments
- Ensure the applicant has a history of responsible credit use.
What factors contribute to the lender’s decision when reviewing these three areas? We’ll explore them below.
Credit Scores Matter
On paper, FHA loan rules allow loan approval for borrowers with FICO scores between 500 and 579–this is possible with a 10% down payment.
The lowest down payment is offered for FICO scores 580 or above. But your lender is free to require higher credit scores than these minimums.
Applicants with credit scores within the 500 range should work on credit through on-time payments and lowered balances on your accounts.
Lender standards will vary–plan on shopping around for a loan and never assume all lenders have identical standards.
Carrying High Amounts Of Debt
Too much debt is a problem. Why? Simply put, having too much debt makes it hard for your loan officer to justify approving the mortgage loan. Does your current debt take up half of your monthly income or more?
You may have difficulty getting a loan approved without compensating factors. A solid goal for your debt ratio should be getting it lower than 43% of your total monthly income.
Not all your home loan expenses can be included in the home loan amount–some cannot be financed. A good example? The FHA loan 3.5% minimum down payment must be paid in cash at closing time and is considered a separate expense. It is not reduced by your paying other costs on the loan.
That means the appraisal fee, the FHA Up-Front Mortgage Insurance Premium, and other closing costs will not be deducted from the amount of down payment.
It is true that some down payment assistance is available for some borrowers depending on the local programs offered near them, that assistance is not available in all areas. You will need to plan on saving up a down payment unless down payment assistance is available.