July 23rd, 2018 7:54 AM by Jackie A. Graves
After the financial crisis of
2008, getting approved for a mortgage became much more difficult. Ten
years later, lenders have started relaxing lending standards again. However,
millions of Americans still get denied when they apply for a mortgage. LendingTree (which owns MagnifyMoney,
where I work) analyzed over ten million mortgage applications from the FFIEC (a government agency) to determine
the leading reasons for denial - and what you can do to improve your
Debt-to-Income Ratio (26% of rejections)
The debt-to-income ratio, frequently called
the "DTI," measures your monthly payments as a percentage of
your gross monthly income. For example, if you make $5,000 a month (gross) and
have total monthly expenditures of $3,000, you would have a DTI of 60% (= 3,000
/ 5,000). Recurring monthly payments are typically included in the calculation.
Your new mortgage payment (including escrow for property tax and insurance),
car payments, student loan payments and credit card payments would be included
in the calculation.
Historically, most lenders want a DTI of 45% or less, and
LendingTree's analysis demonstrated that 26% of mortgage denials were a result
of having a DTI that is too high. There are many ways to reduce the DTI. First,
consider a smaller mortgage. That might mean you should
consider buying a smaller home or waiting longer (to save a larger down payment).
Fannie Mae has
recently increased (for some borrowers) the maximum DTI to 50%. But borrowers need to
remember the lessons of 2008. Just because a lender thinks you can afford the
loan, doesn't mean you should sign on the dotted line. If 50% of your monthly
gross income goes to fixed monthly payments, you will have limited flexibility
in an economic downturn.
Credit History (26% of rejections)
As part of a mortgage application, lenders will review your
credit history (via the credit reporting agencies) and your credit
score. The credit scores used for most mortgages might
surprise you: typically, banks use older versions of the FICO score. Free
credit score sites do not actually provide you with the specific version used
by Fannie Mae and Freddie Mac. If you are worried, you can purchase the scores
used in most mortgage decisions at myFICO for $59.85. That is a steep price
to pay for a credit score. Most free credit score sites provide you with your
VantageScore, which is an excellent approximation of the FICO used in
mortgages. However, if your score is borderline, you might want to look at your
FICO before proceeding.
In addition to your credit score, lenders will want to ensure
that you have enough credit history. You could have an excellent score but only
have one secured credit card open for 18 months. Each lender is different, but
most will want a minimum number of tradelines and a minimum number of years
with a credit file.
If your score falls short, you can use a free estimator from myFICO to see what changes in your
behavior will do to your score.
Collateral (17% of rejections)
You might be willing to pay $300,000 for your new home. But if
the bank doesn't think the home is worth $300,000 you won't be able to get a
loan. Most mortgage lenders will hire an appraisal company to perform an
independent appraisal. The appraiser will typically examine the interior of
the property and study recent comparable sales. The appraisal protects you as
much as it protects the bank: this is an excellent way to ensure you are not
paying too much for your home.
Fortunately, there are many tools available so that you can
perform some of the same analysis. Use sites like Zillow or Realtor.com to review comparable
sales. Don't rely upon the estimated values of the home. But you can
search the database to review recent comparable sales. And be careful if a
bidding war starts on the home of your dreams. Before you start bidding, set a
maximum amount that you would be willing to pay, and walk away if the bidding
gets too high. Although it is difficult to walk away from a home you love,
there will be more available and a good realtor will be willing to work with
you and wait.
Source: To view the original article click here