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3 Top Reasons Lenders Deny Mortgage Applications

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If you're applying for a mortgage, chances are good you're excited about buying a home and starting your next chapter in a new location. That's why it can be so disappointing if your mortgage lender turns you down and says you can't borrow.

Your would-be lender should tell you why you were denied, but it can also be helpful to know in advance some common reasons why mortgage loan providers turn people down for home loans. Here are three top reasons why a prospective buyer may be told they cannot get a mortgage.

1. A low credit score

In general, to get a conventional loan (one not backed by the government), you need a credit score of at least 620 (although this requirement can vary by lender). If your score is below this and you've applied for a loan with a borrower that doesn't specialize in bad credit loans, chances are your application will not be approved.

The good news is, there are loan options out there even for people with low credit. You may want to look into an FHA loan, which could be available with a credit score as low as 500. This loan is backed by the Federal Housing Administration and is designed to make homeownership available to borrowers with imperfect financial credentials by allowing private lenders to approve them with lower scores and down payments.

2. Having too much debt

If you have too much debt, this is also likely to lead to mortgage denial. Most mortgage lenders like your total debt, including the amount you'll spend on the new home loan each month, to be below 36% of your income. If you exceed this, you may not be approved for a home loan.

You can solve this problem by paying down your debt so your debt-to-income ratio drops below 36%. You can also look into lenders that are more willing to work with borrowers with a higher ratio or could opt to find a cheaper house that comes with less expensive monthly mortgage payments.

3. Problems with the home appraisal

Issues with an appraisal are another major problem that can result in a mortgage loan being denied — often at a later stage in the process.

When you apply for a loan, you first need to provide your financial credentials to make sure you meet the bank's borrowing criteria. But, the lender also will want to be sure it is not loaning you too much money relative to the market value of the home.

Lenders have different caps on how much you can borrow relative to what a house is worth. In some cases, you need to make sure you're borrowing less than 90% of a home's worth. This would be called a 90% loan-to-value ratio.

The home's value is determined based on what an appraiser says the house is worth. So if you offered $500,000 for a house the appraiser said is worth only $400,000, this would be a huge problem because your loan-to-value ratio would be based on the home having a market value of $400,000.

If the lender's max loan-to-value ratio is 90%, then you'd only be allowed to borrow $360,000 and would need to come up with the other $140,000 for the home. In this case, you'd need to have a large savings account balance or might need to go back to the sellers and try to get them to accept a lower price for the home.

These are all important reasons why lenders may not give you a home loan. You should be prepared for these possibilities and take the steps mentioned here to try to reduce the likelihood they will stand in your way of homeownership.

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