Mortgage lenders reject about 30 percent of home loan applications and 50 percent of refinance applications, according to Bankrate.com. Mortgage lending guidelines have tightened in recent years, and it has become harder for many to qualifying for financing. If you're contemplating a home purchase or refinance, familiarize yourself with mortgage requirements and recognize factors that can result in an automatic denial.
Your mortgage lender will request copies of your bank statements and investment account statements before approving your home loan application. Buying a home requires cash for your down payment and closing costs. Down payment amounts vary by loan program and range from 3.5 to 20 percent of the selling price. In addition to this cost, you'll pay between 3 and 5 percent in closing costs. Closing costs include fees paid to your lender for originating the loan, appraisal, title search, and escrow and credit report fees. Disclosing your assets reveals the source of your down payment and closing costs. If you don't have enough cash to cover these expenses, the mortgage lender will deny your home loan application.
Qualifying for a mortgage loan also requires an acceptable credit history and credit score. Mortgage lenders are inflexible about credit. Your income may allow you to qualify for a particular mortgage, but if a review of your credit history reveals a low credit score, missed payments and derogatory statements, the mortgage lender will deny your application. Qualifying for a mortgage typically requires a minimum credit score of 620, as of 2012.
Too Many Debts
A high debt-to-income ratio is another factor that can cause a lender to automatically deny your mortgage application. Debt-to-income ratio refers to the percentage of gross monthly income that goes toward debt. The higher the amount of debts in your name, the higher your debt-to-income ratio. You can calculate your debt-to-income ratio by taking the total of your minimum debt payments and dividing this figure by your gross monthly income. To qualify for a home loan, your debt payments, including the future mortgage, generally cannot exceed 36 percent of your gross monthly income.
A mortgage lender may also deny your home loan application if you're unable to provide sufficient proof of income. Lenders no longer approve stated-income home loans. These types of mortgages allowed borrowers to obtain home loans without providing tax returns or W-2s, providing they had a high FICO score. Nowadays, employment record and income stability weigh heavily on the decision process. Two years of consistent employment -- preferably within the same field -- is required by most lenders. Lenders also require tax returns from the past two years and a recent paycheck stub. In addition to tax returns, self-employed borrowers must provide a year-to-date profit and loss statement.
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