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If your mortgage loan was declined, it’s not the end of the world. It’s just a temporary setback.

There are many reasons why the lender says no to a buyer, but the most common reason is the Debt-to-Income Ratio is too high. If you owe too much of your monthly income on debt, they are more of a credit risk. Lenders have varying DTI limits, but you’ll find that 43% is the highest ratio a buyer can have and still get a qualified mortgage.

Key Points Regarding A Mortgage Decline:

  1. People are usually surprised that their credit is insufficient. Most of us don’t look at our credit score at all, or we only give a cursory look. Most often, applicants are checking their credit on one of the free online resources. While these sites are helpful, they are not as in-depth as what a lender is looking at. Lenders look at the entire credit profile, including credit history, debt-to-income ratio, employment, and other factors.
  2. Don’t give up. Having good credit isn’t a sprint; it’s a marathon. You can spend a few months or maybe up to a year to get mortgage-ready. When you find out exactly what you can do, whether it is decreasing your debt, or paying off any collections, you can take the steps necessary, and be able to get back to searching for a home. Owning a home is a life goal for many people. Buying a home is likely the largest financial purchase most people make, so it makes sense that it may take some time to prepare for it. This is why we encourage people to not only get pre-qualified, but pre-approved for a mortgage.
  3. Most of the time the debt-to-income problem is due to credit card payments. The good news is that credit cards are the easiest to take care of. However, they need to be taken care of in a strategic way; guidance from a credit counselor or a lender is helpful.
  4. It’s a good idea to check your credit report and know what your credit and debt situation is before you call a Realtor® or a lender. Know what’s on your credit report. You are able to access a free credit report each year from the top credit reporting agencies:  Transunion, Experian, and Equifax.
  5. If you don’t have little or no credit, it can take longer to build it. FICO® Scores are the credit scores used by 90% of lenders to determine your credit risk. The FICO score is based on several things, including your payment history. The longer the history, the better, but you will need at least 12 months of credit payments of some kind. If you don’t have enough credit, you’ll have to establish it and make timely payments to build it up.

How Underwriting Works

When you get declined by a lender, it doesn’t mean you shouldn’t buy a house, it just means you have a little work to do before you can. Working with your lender or a credit counselor can help you meet the criteria.

The loan officer (that’s me!) is the one who packages your loan. They know generally what the underwriter is looking for with each loan product and will collect the necessary paperwork from the borrower. Then they will turn it all over to the underwriter within 72 hours to a week before the scheduled settlement.

Underwriters decide whether to approve the loan, decline the loan, or if there is a third determination, suspend the loan. In this case, the borrower would be asked to supply additional documents to satisfy the underwriting requirements.

The underwriter usually wants to view the previous 12 months of financial activity. The FICO score also weighs the most recent 12 months more heavily. So, if you are declined for a mortgage, the good news is that you can make the changes necessary to improve your credit-worthiness within 12 months. In the grand scheme of things, that’s no time at all!

Apply today to see if you are pre-qualified for a loan!

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