5 Reasons Mortgage Applications End Up Rejected

Picture this nightmare: You apply for a mortgage, but your application gets rejected. Suddenly, you’re hit with an overwhelming wave of embarrassment, shock, and horror. It’s like having your credit card denied at the Wal-Mart.

So, according to a recent Federal Reserve study, one out of every eight home loan applications (12%) ends in a rejection.

There are several reasons mortgage applications get denied‚ and the saddest part is that many could have been avoided quite easily, had only the applicants known certain things were no-nos. So, before you're the next home buyer who gets burned by sheer ignorance, watch this video, and make sure you aren't making any of these five mistakes.

1. You didn't use credit cards enough

Some people think credit card debt is the kiss of death ... but guess what? It's also a way to establish a credit history that shows you've got a solid track record paying off past debts.
While a poor credit history riddled with late payments can certainly call your application into question, it's just as bad, and perhaps worse, to have little or no credit history at all. Most lenders are reluctant to fork over money to individuals without a substantial credit history. It's as if you're a ghost and no one thinks ghosts are reliable.

According to a recent report by the Consumer Financial Protection Bureau, roughly 45 million Americans are characterized as "credit invisible”—which means they don't have a credit report on file with the three major credit bureaus.

There’s a silver lining, though, for those who don’t have credit established. Some lenders will use alternative data, such as rent payments, cellphone bills, and school tuition, to assess your creditworthiness. Just ask.

In the meantime, get a credit card and buy something you routinely spend money on with it, like groceries or gas, and then pay it off at the end of the month. In about six months you'll be ready to go with a strong credit history.

2. You opened new credit cards recently

That Old Navy credit card you signed up for last week? If you're planning to buy a home in the next couple of months, well, that's a bad idea. New credit card applications can ding your credit score by up to five points.

That hit might seem minuscule, but if you’re on the cusp of qualifying for a mortgage, your new credit card could cause your loan application to be denied.

So, the lesson is simple: Don’t open new credit cards right before you apply for a mortgage—and, even if your lender says things look good, don't open any new cards or spend oodles of money (on, say, furniture or clothes) until after you've moved into your new home. After all, lenders can yank your loan up until the last minute if they suspect anything fishy, and the fact is until you get cleared to close during escrow, your loan approval isn't guaranteed even if you're preapproved.

"Before I move on if you have questions about preapproval and how to get preapproved for a home loan, check this video out - link is in the description"

3. You missed a medical bill

Credit cards aren't the only debt that counts with a mortgage application—unpaid medical bills matter, too. Why? I don't know. This is one of those things (like not being able to add college debt to your bankruptcy) that just doesn't make sense. Just like a personal catastrophe that can land you in the hospital can cause some to lose a home, medical debt can also cause you to miss out on ever buying one. When you default on medical bills, your doctor’s office or hospital is likely to outsource it to a debt collection agency. The debt collector may then decide to notify the credit bureaus that you’re overdue on your medical payments, which would place a black mark on your credit report. That’s a red flag to mortgage lenders.


If you can pay off your medical debt in full, do it. Can’t foot the bill? Many doctors and hospitals will work with you to create a payment plan. Some will even do an income and budget analysis and cut a significant portion of the payment due down. Sometimes by more than 45%. Still, even getting on a payment plan and showing a mortgage lender that you’re working to repay the debt could strengthen your application.

4. You changed jobs

So you changed jobs recently—so what? Problem is mortgage lenders, like to see at least two years of consistent income history when approving a loan. As a result, changing jobs shortly before you apply for a mortgage can hurt your application.
Of course, you don’t always have control over your employment. For instance, if you were recently laid off by your employer, finding a new job would certainly be more important than buying a house. But if you’re gainfully employed and just considering changing jobs, you’ll want to wait until after you close on a house so that your mortgage gets approved.

One exemption to that is if you change jobs but remain in the same industry. For example, I was a chef when I bought my first home and if you know anything about food service, cooks, servers, and bartenders change jobs a lot. It's almost necessary to make better money. However, I had over a 10-year record of being in the food-service industry and over 4 years as a chef manager and was able to secure the loan with that record.

5. You lied on your loan application

This one seems painfully obvious, but let's face it—while it may be tempting to think that lenders don't know everything about you financially, they do their homework! No matter what you're thinking, be honest with your lender—or there could be serious repercussions. Exaggerating or lying about your income on a mortgage application, or including any other "untruths, can be a federal offense. It’s called mortgage fraud, and it’s not something you want on your record.
Bottom line? With mortgages, honesty is the best policy.

So there you have it. Five reasons mortgage applications end up rejected and how to avoid them.

I hope this video was helpful. Remember to share it and if you are interested in learning about how to get preapproved for a home mortgage loan, check out my video on that by clicking on the thumbnail at the end of this video.

I put a new video out every Monday so look out for that.
 
Thanks for watching and talk to you soon.