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How To Avoid Having Your Mortgage Application Denied

How To Avoid Having Your Mortgage Application Denied

Getting approved for a mortgage isn’t easy. However, you can reduce the odds of having your mortgage application denied. Knowing the common reasons for mortgage application denials can help you to take action in advance to ensure your mortgage application meets your lender’s criteria.

In 2019, about 8% of all U.S. homebuyers had their mortgage loan application to purchase a single-family home denied, according to data that mortgage lenders submitted to the federal government under the Home Mortgage Disclosure Act. If your mortgage application has been denied, it doesn’t mean you can never be a homeowner.

There are many reasons why a mortgage lender does not approve a mortgage application. Fortunately, the reason(s) for denial can often be overcome. The key to success is understanding the reason(s) and what you can do to correct the problem(s).

5 Common Reasons Mortgage Loans Are Denied

Understanding the top reasons why mortgage applications get rejected can help you avoid receiving a denial.

1 – High Debt-to-Income

Debt-to-income ratio represents the percentage of your income that goes towards paying your monthly debts, and helps a lender determine how much they will lend based on your ability to repay the money you have applied to borrow.

FinLocker recommends that borrowers achieve a debt-to-income (DTI) ratio below 45%, but a lower ratio is better. Debt-to-income can be calculated by adding up all of your monthly debt payments, such as rent, car payments, student loan payments, credit card payments, and weighing them against your gross income. FinLocker users can connect their bank and credit card accounts, loans and other debts, then use the readiness assessment to monitor their progress towards a lower DTI.

Tips to reduce your DTI: Pay down debt (credit card balances, student loan, auto loan, personal loan) or increase your income.

2 – Low Credit Score

The higher your credit score, the more likely your mortgage application will be approved, and the lower the interest rate you will be offered.

Most mortgage lenders recommend having a minimum 620 credit score to apply for a conventional or FHA home loan. While some mortgage programs will accept a lower credit score, they will charge a higher interest rate because a lower credit score indicates that the applicant has a higher risk of default.

Tips to build your credit score:

  • Pay your bills on time each month.
  • Pay down your credit cards.
  • Don’t open new credit card accounts.
  • Limit spending on credit cards to what you can pay off each month.
  • Review your credit reports for errors.

3 – Credit History

Past delinquencies, bankruptcy, a previously owned home lost due to foreclosure, or a short sale, can all come back to haunt mortgage loan applicants, even if those accounts have been settled. When lenders tighten their mortgage lending rules, which happened in 2020 due to the economic uncertainty resulting from the coronavirus pandemic, homebuyers can face additional hurdles to qualify for a home loan. For example, a borrower who has reestablished good credit can apply for an FHA home loan two years after a Chapter 7 bankruptcy. However, in times of economic uncertainty, a lender might require a longer waiting period.

Tips to repair credit history: Before applying for a mortgage, you should review your credit reports from each credit reporting agency. You have the right to obtain free credit reports from annualcreditreport.com or 877-322-8228, the only authorized source under federal law. Check that any previously delinquent accounts have been updated to reflect their current status, for example, paid in full. The website has advice on how to file a dispute if you see any errors.

To improve your credit history:

  • Start by paying your bills on time each month.
  • Don’t close unused credit card accounts when they’re paid off.
  • Cut up the card if the temptation is too great to use them.

4 – Low Down Payment

Lenders look carefully at the loan-to-value (LTV) ratio on your mortgage application to compare how much you’re asking to borrow versus the value of the home you want to purchase. While you can apply for a home loan with a 3% down payment, and VA and USDA home loans will accept zero down payment from qualified applicants, a higher down payment will lower your LTV.

Lenders like to see low LTV ratios as it helps protect their investment if you’re unable to make your mortgage payments at a future date. That’s why most mortgage programs with an LTV above 80% require private mortgage insurance, which is paid with your monthly mortgage payment.

Tips to save a higher down payment: While it’s important to pay down your debts to lower your DTI, it’s just as important to save money to increase your down payment. Once you’ve got your DTI paid down to below 45%, start saving most of the cash flow you had been using to pay down your debts.

5 – Low Appraisal

Home prices incrementally soar in a hot housing market, so the appraiser might find it difficult to find recently sold homes in that neighborhood to use for the appraisal comparison. If the appraisal for the property you want to purchase is significantly lower than the purchase price, the loan-to-value (LTV) may be higher than the lender can legally approve.

Tips to resolving a low appraisal: Fortunately, property valuation issues can often be resolved. This is when it’s good to be working with an experienced real estate agent because they can renegotiate the property’s purchase price. If the seller won’t budge on the sales price, another option is to make a larger down payment to make up the difference between the lender’s loan amount and the sales price. Alternatively, find another home within your budget that will appraise for the market price.

No one wants their mortgage loan denied, especially if they were pre-qualified or pre-approved. Fortunately, most of the reasons mortgage applications are denied can be prevented. If your financial circumstances have changed since you got pre-qualified, pre-approved, or denied, it’s important to talk to your lender before submitting a mortgage application. They can advise you if your current circumstances will affect the likelihood of your mortgage being approved or denied, and advise you how to improve your odds for approval.

Tips To Find Your First home

7 Tips To Find Your First Home

If you’re looking to find your first home in a city or neighborhood with a low inventory of affordable starter homes, how do you decide what you want and what you need, and buy that home for a price you can afford? Check out these tips to find a home you’ll love – for now.


1 – Organize Your Wants Vs. Needs

Before you start looking at homes, make a list of needs and wants. If you are single or a couple, you might want a larger home to grow into, but a smaller home might meet your needs for the next few years.

When you’ve created your lists, use the filters on one of the online real estate websites to see if what you want is affordable in your preferred neighborhood. If a 3 bedroom/2 bathroom home in a hip downtown neighborhood is what you want but can’t afford, decide if a 2/1 in the same neighborhood will meet your needs for the next few years.


2 – Don’t Bust Your Budget

Buy a home you can afford. Having a less expensive mortgage will enable you to pay off student loans, car loans, take a vacation each year, and save for your next financial goals.

Get pre-qualified or pre-approved for a home loan before you start house hunting. Your mortgage lender will review your finances and let you know if you need a higher credit score or down payment. They’ll also provide a realistic budget, so you can confidently place an offer when you find a home.


3 – Consider Old Vs. New

Do you see yourself in a beautiful older home or a more modern, chic abode? An older home may require more maintenance, but new homes are often built in neighborhoods further out of town. The asking price for a newer home in the same neighborhood will likely be higher than for older homes of the same size.


4 – Rushing In Vs. Dragging Your Feet

It may be necessary to make an offer fast when you find a home you like. Ideally, you can take a few days to revisit the home at night and at different times of day to see if the neighborhood is safe, has more traffic on the weekday vs. weekend, etc.

House hunting can be time-consuming and losing out because someone made an offer can be heartbreaking. Buying a home is a high-cost investment, but you must have the confidence that you will be prepared to place an offer when you find a home that meets your needs.


5 – Real Estate Agent Vs. Buying On Your Own

The prevalence of real estate websites can make it seem easy to find a home. A real estate agent has “fiduciary” responsibility to their clients, so they are legally obligated to put their clients’ best interests first. They will only get paid – by the seller’s commission – when you buy a home. When it comes time to make an offer, understanding purchase agreements and all of the other associated documents, they’re usually worth their weight in gold.

If you decide to buy on your own, consider hiring a broker for a smaller one-time fee to simply review your contracts before signing.


6 – Offering Too Much Vs. Low Ball Bid

If there are several offers on the home you love, it’s easy to get sucked into a bidding war and end up paying more than the house will appraise at and your mortgage lender will finance.

If the house has been on the market for a while, is outdated, or requires repairs, there is often an opportunity to make an offer below the asking price. Be prepared for the seller to reject your offer or make a counteroffer; use this opportunity to negotiate.

A real estate agent can look at comparable sales to ensure your offer is reasonable for both the house and the location.


7 – Have An Exit Strategy

Starter homes aren’t meant to be your forever home. You’ll probably make a few compromises on size or location to purchase a home that meets your current needs. Before you make an offer on any home, you need to think about its resale value or rental potential. A home in a good neighborhood, school district, or near transportation has good resale value. Keeping the home maintained while you live there will help you to get top dollar when it’s time for your next purchase.

As a first-time homebuyer, the home you end up purchasing probably won’t be your dream, forever home. And that’s OK! If you lose a home in a bidding war, or it takes longer than expected to find a home within your budget, don’t lose faith. Discuss your wish list and needs list with your real estate agent. He/she can help you decide if your expectations are realistic or suggest other neighborhoods to help you buy a home that meets your current needs.

How Consumer-Permissioned Data Provides Consumers With Extra Protection During Financial Transactions

Consumer-permissioned data puts the consumer in control of what transactional data they share with a lender, insurance company, other financial institutions, or service providers.

What is Consumer-Permissioned Data?

Consumer-permissioned data is personal transactional data that a consumer grants permission for a business to access on their behalf. Examples include online banking or bank transaction data such as checking, savings, and investments.

The consumer provides permission to the lender to securely access the data on their behalf by entering their username, password, or other authentication credentials directly into the lender’s online application or loan processing portal themselves.

Benefits of Using Consumer-Permissioned Data in the Lending Process

At first glance, the idea of giving a lender access to their personal and financial information might make a consumer cringe. The reality is that consumer-permissioned data will protect a consumer’s information during the lender process significantly more than faxing, emailing, and mailing their personal and financial documents.

Consumer-permissioned data is a win-win for consumers and lenders. Consumers don’t need to track down, copy or print hard copies of bank statements and W-2s for insistence.

Instead, the consumer gives a lender electronic access to retrieve specific financial data from their financial accounts, which they need for a lending decision. This process helps prevent repeated requests for information as emails and printed documents that can be accidentally deleted or lost due to human error during the application process. Having all personal and financial information provided electronically gives the lender the ability to make faster, more accurate decisions.

Establishing Trust Drives Business

Empowering consumers to control what data they share, when they share it, and to whom they share it establishes an additional layer of trust between the consumer and lender. When consumers are convinced an organization is protecting their personal data, 40% of consumers increase their transactions, 39% increase spending, and 49% go on to tell friends and family about their positive experience with an organization, according to Capgemini.

How FinLocker Empowers Consumers With Consumer-Permissioned Data

FinLocker uses consumer-permissioned data to provide consumers with an extra layer of protection when deciding to share their personal and financial documents with their lender for a mortgage application. The process puts consumers in the driver’s seat, providing consumers with an accurate and seamless way to securely transfer documents to their lender.

A FinLocker user can upload their personal and financial documents to their FinLocker account at any point along their journey towards mortgage readiness. When the consumer is ready to proceed with their mortgage application, they select which documents they want to share electronically with their lender. They can also decide to provide their lender with access to other financial data by signing in to their financial accounts using secure consumer-permissioned data protocols.

The trust built between consumer and lender during the entire journey to mortgage readiness using FinLocker culminates in the consumer-permissioned data transfer to provide a seamless mortgage application process.

10 Ways To Save For A Down Payment On A Home

Saving for a down payment is one of the major hurdles most first-time homebuyers face on their journey towards homeownership. However, with a clear savings goal, a solid savings plan, and adopting a few savings strategies, you’ll be well on your way to saving for your first home.

1 – Start with a clear savings goal

Start by calculating how much you will need for your down payment and closings costs. FinLocker users can use the Home Affordability calculator, which will estimate a total home budget based on your income, and display the minimum down payment for a Conventional (3%), FHA (3.5%) and VA (0%) home loan, and the estimated closing costs for each loan type.
The example scenarios below are based on a 30-year mortgage term at a 4.25% interest rate.

On a $75,000 annual income you could afford a $265,000 home with a Conventional loan

  • Monthly Payment: $1750.67
  • 3% Down Payment: $7,940.00
  • Est. Closing Costs: $10,587.00
  • Total to Save: $18,527.00

On a $75,000 annual income you could afford a $286,808 home with an FHA loan

  • Monthly Payment: $1937.03
  • 3.5% Down Payment: $10,038.00
  • Est. Closing Costs: $11,472.00
  • Total to Save: $21,510.00

On a $75,000 annual income you could afford a $411,506 home with a VA loan

  • Monthly Payment: $2530.59
  • 0% Down Payment: $00.00
  • Est. Closing Costs: $16,460.00
  • Total to Save: $16,460.00

2 – Create a household budget

1. Write down your bills and regular expenses.

• Bills that are the same each month, like rent
• Bills that might change slightly each month, like utilities
• Bills you pay once or twice a year, like car insurance
• Minimum credit card or loan payments. Anything beyond the minimum goes into the savings and debt repayment category.

Regular Expenses
• Food
• Transportation or Gas
• Entertainment, Cable
• Clothes
• Unplanned expenses, like car repairs or medical bills
• Child care or other expenses you need so you can work.

2. Write down how much money you make after tax.
3. Subtract your bills and expenses from how much money you make
4. Review your budget to see what you do not need or how you could spend less.
5. At the start of each month, plan how you will spend the money you earn that month.
6. At the end of the month, see if you spent what you had planned.

3 – Avoid your spending triggers

While you were reviewing your bank account transactions, you may have noticed a few spending habits that you can adjust to find additional savings.
We all have those places or people that make us want to spend a little too much. Maybe it’s a discount department store or auto shop, or the need to upgrade your phone with each new release. Until you’re feeling confident with your budget, limit your contact with those triggers, so you can focus on what you’ve planned to spend in that category. Challenge yourself: Can you resist the temptation to upgrade your phone while you’re saving and working on improving your credit?

4 – Go on a 30-day spending diet

For one month, only make essential purchases: no new clothes, no take-out, no new gadgets or toys. Deposit the money you saved each week into your savings account. At the end of the month, see what areas you can maintain to keep your savings growing.

5 – Think before you shop

Buying something impulsively, can throw your budget out of whack. Instead, give yourself 24 hours before purchasing. You’ll typically wake up the next day a little less excited about that deal, which can help you feel confident about making future buying decisions rationally.

6 – Look for savings before you shop

If you regularly shop at certain stores, you probably know when they offer their best deals, so wait to shop then. Check out your supermarket’s weekly sales so you can plan your shopping list, and stock up on the sale items you regularly use. Save even more at the supermarket with coupons online or in the supermarket’s app.

7 – Adjust your insurance

If you only use your car for local trips, ask your auto insurance company if you can adjust your insurance coverage to save money on your monthly premiums. An independent insurance broker can also find other ways to save, such as increasing your deductible amounts or combining multiple policies with the same provider.

8 – Open a separate savings account

Reduce the temptation to spend the money you’ve been saving by stashing the money in a separate savings account. If you’ve noticed that you can regularly save $100 from each paycheck, ask your employer to set up an automatic deposit for a set amount from each paycheck into this account. Look for a financial institution that pays interest on the savings account.

Additional ways to reach your down payment goal

9 – Tips To Save Some Green While Making Make Your Home Greener
10 – Giving and Receiving Gift Money For A Down Payment

Lifestyle Benefits Of Owning Your Home

A home is more than just a roof and walls. The financial benefits of being a homeowner are easy to calculate. However, homeownership also has lifestyle, health, and social benefits for the homeowner, their extended family, and the community.

Gain a Community

Homeowners often feel more attached to their community. The more homeowners who reside in a neighborhood, the more stable and secure the neighborhood will be for all residents. Many neighborhoods have associations that will plan social events and volunteering opportunities so you can get to know the people who live around you.

Provide Stability

Psychologically, owning a home provides a sense of stability to homeowners. If you have children or want to start a family, owning your home can provide your family with the stability to plan for the future. You can stay put until you decide that the time is right for you to move, and when you do, you take the equity you’ve earned to help purchase your next home.

Improved Health

Studies show that overall well-being for a person improves when they move from renting to owning a home. Homes lived in by their owners are generally in better condition than those of renters. A steady home provides the family with higher self-esteem, lower levels of distress, and more positive mental health, which helps lower blood pressure.

Educational Achievements

According to a study in the Journal of Urban Economics, children of homeowners are significantly more likely to stay in school until age 17 than children of renters, especially in low-income households.

Children who lived in a homeowning family outperform children in renting families in both math and reading achievement tests. These children often have higher self-esteem, fewer behavioral problems, higher educational attainment, and greater future earnings, according to a study by an Ohio State University economist.

Show Your Style

Most landlords will not allow you to personalize the rental property by hanging pictures, painting walls, or retiling the backsplash. Buying a home gives you the flexibility to make cosmetic and functional modifications so your home can reflect your style and living requirements.

Renters do not gain any monetary value when they improve the property where they live. As a homeowner, any improvements are investments that will contribute to the home’s value.

Get A Pet

It is often difficult to find a rental property that will allow you to have a pet. And when they do, landlords usually require a pet deposit. When buying your own home, particularly one with a back yard, you gain the freedom to own dogs, cats, birds, lizards, chickens, or any other type of pet. Homeowner associations can restrict the number of pets, size, and breed of dogs, so check the HOA regulations before buying into an HOA community.

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