As the U.S. economy continues to rebuild from the recession almost ten years ago, lots of people are looking to buy homes after years of renting or staying put in an existing home. As a result, the real estate market is competitive in many parts of the country, requiring buyers to put in aggressive offers and, in some places, compete with deep-pocketed investors paying cash.
What this means is that—now more than ever—you need to be qualified for a mortgage before you shop for real estate.
The credit score is vital during the home buying process. The score helps lenders determine your ability to borrow and pay off a loan.
A high score qualifies you for a loan, but also opens access to more options. A low score limits options if it doesn’t keep you from getting a loan in the first place.Sometimes a high score isn’t enough to put you over the top and into the home you want. There are options and one of the least heard of by the public, are non-qualifying mortgages, or non-QM.
Often saved as a ‘last resort,’ a non-QM can be your best friend. Depending on several factors, a buyer may want to consider a non-QM first — here’s looking at you Generation Y.
But, for those who want to try the conventional path, here are some options if the mortgage application is declined even after pre-approval.
What If The Mortgage Is Refused After Pre-approval?
One of the first steps in getting a mortgage is going through the pre-approval process. An early talk with a mortgage professional will help determine how much a person can actually afford when purchase a home and how big a mortgage may be finally approved. A mortgage pre-approval helps focus on homes within a given price range as well as letting sellers know they have a serious, qualified buyer.
Pre approval is not equal to final approval. Although a person may have been pre-approved, that doesn’t mean they will definitely be able to secure a final mortgage
There are several reasons a mortgage may be rejected despite pre-approval. These include:
A Change in Employment
The initial application is based in part on employment status. If the job is changed after the application was submitted, there can be problems. Employment changes is one of the most common reasons for mortgage denial.
To combat this, many programs require that borrowers have a steady job for a specified time period. If that should change suddenly, the applicant could be in jeopardy. There are exceptions. For example, if the job change is in the same — or greater — salary.
But if the change is into a different industry, or the job status is not full-time or permanent, many lenders may have an issue.
Applying for a new loan after initially applying for a mortgage, could mean the borrower doesn’t get the loan. Debt load is a factor which lenders look at when evaluating a borrower’s financial health.
Pre-approval is based on the total debt which was carried at the time the application was filed. If the debt load spikes because of other loans being taken out, the odds of mortgage denial is higher. Any loan, such as a car loan, a personal loan or any other loan which adds more debt to the pile endangers the mortgage application.
The home to be bought will need to be assessed by a professional appraiser selected by the lender. The reason is to make sure the value is in line with the purchase, or asking, price. If the appraisal comes in lower, the buyer may have problems getting final approval for a mortgage.
The buyer can come up with the extra money or walk away from the deal.
Credit Score Drops
The credit score plays a vital role in getting a mortgage. If that drops for any reason, the mortgage may be denied.
Change in Requirements
Lenders can make changes to criteria for mortgages even though a loan has been pre-approved. For example, lenders might increase the credit score requirements, change the ratio of debt-to-income which they will accept or even increase they amount required of borrowers to have in savings. Regardless of the reasons, changes could put the buyer in a possible position to miss out on a mortgage.
What If The Mortgage Still Gets Denied?
If the lender rejects the loan application, all might not be lost. There are a few things to do after getting denied to see if the chances of getting the mortgage approved increased. These include:
Get A Non-QM
A Non-Qualified Mortgage (Non-QM) is any home loan that doesn’t comply with the Consumer Financial Protection Bureau’s existing rules on Qualified Mortgages (QM). Usually this type of correspondent mortgage loan accommodates people who are not able to prove they are capable of making the mortgage payments.
Depending on the details in the contract, your lender may be able to convert it to a standard, traditional qualifying mortgage after you have established a paying record.
Ask why you were denied. The entire application process is rigorous. If you have several strikes against you, the loan officer will give an indication of why you may not qualify.
The lender is supposed to tell you why you were turned away. You need to know what steps you need to take to get on a better financial footing and try to re-qualify later.
The credit scores is vital in determining loan amounts, types of loans and mortgage rates. Take the time to examine your credit report closely. Make sure there are no errors which may drag the rating down.
If turned down for a mortgage, don’t assume that’s the end of the road. There are other options and other financial organizations and you may qualify for a loan with another lender.
Pay Down The Debt
Even with a strong credit score, lenders look at how much is already owed for credit cards, car payments and student loans. This is compared to the amount of money you make and is called the debt-to-income ratio.
Usually lenders want to see a ratio of less than 43%. If you don’t meet that profile that number can be overcome. One of these best things to do is pay off other debts.
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