Applying for a mortgage loan can be daunting and roughly 30 percent of purchase mortgages are rejected, according to the Mortgage Bankers Association. The reasons behind these rejections vary, but it’s important to understand and educate yourself on how the mortgage process works and what lenders consider to be red flags. For a mortgage process that is predictable and relatively stress-free, take a look at the following red flags and tips, so you can get the house you want.
Shop around for your loan
Take the time to comparison shop for your mortgage loan, to assure finding the right lender offering the best deal. Some will even offer a cash incentive at closing for selecting them. Also, compare different loan products, such as fixed-rate vs. adjustable rate (ARMs), and conventional loans vs. interest-only loans. All have their pros and cons, and should be carefully considered.
Tip: Limit how many times you actually submit an application, however, because each will ding your credit report.
Tip: Also consider government-backed mortgage options. Federal, state and municipal governments have a number of programs designed to help people in lower income brackets and/or who have foreclosures and defaults in their credit history to secure mortgages. Because the mortgages are backed by government entities, they have much more flexible, lenient terms than most private mortgages. Depending on your financial situation, programs like this may be your best option.
Waiting too long for rates
Yes, a one percentage point difference in your loan rate can mean thousands of dollars over the life of your mortgage. But, mortgage interest rates are generally expected to increase gradually over the next year. So, it’s a gamble to wait for rates to go down again. Trying to second guess the mortgage market to capture the absolute lowest rate and fees for your loan is similar to trying to time the stock market. But do keep an eye on interest rates before and during the process because you’ll have the choice to lock or float the rate on your loan.
Tip: Begin a conversation with a mortgage lender and get the pre-approval process started so you’ll know what you can truly afford in shopping for a home. Establish good communication with your lender and be available throughout the financing process. Paperwork requirements can require additional documentation and if you’re not around to provide it, you can delay or even jeopardize the process.
A less-than-stellar credit history
The lowest credit score most lenders will accept is about 620 and above, depending on your lender. Before applying for a loan, check out your credit and improve it, if necessary. It’ll save you in the long run if you take the time to improve your credit score, as you will be able to qualify for better interest rates.
Red flags: Keep in mind that if you do have good credit, but your record includes late payments on a prior mortgage, a short sale, foreclosure or declared bankruptcy in the last two years, it’ll be almost impossible to qualify. Also, mortgage applications require the applicant to list references. These references help lenders verify certain information provided by the application. Providing incorrect information that the reference cannot verify, can result in disqualification.
Qualifying income is too low
The quickest way to get your mortgage rejected is to have an income that’s too low for the mortgage amount you’re seeking. This is why lenders and realtors stress the importance of getting pre-approved, so you know how much you can afford before even starting the formal application process.
Red flags: If you’re planning to rely on bonuses, overtime or rental income, you may also have trouble when applying. And, if your spouse is planning to contribute, but has credit issues, that contribution won’t be considered by the lender.
Other debt commitments
You will run into problems qualifying for a mortgage if your projected monthly payments — mortgage in addition to payments for your car, credit cards, student loans, and most other debts — is more than 45 percent of your total income.
Tip: Many people think that it is in their best interest to get large purchases completed prior to applying for their mortgage. Total debt is a key component in determining how much home you qualify for, so it’s best to wait until after you’ve closed escrow to make those big buys.
The key costs of a mortgage
The total cost of a mortgage consists of four elements often referred to by the acronym PITI: principal, interest, taxes and insurance. Principal represents the amount of money loaned to you. Interest is the cost of that money calculated over time. Taxes are government assessments to pay for local services. Insurance assures the value of the loan by protecting the home from damage or loss and assures the value of the loan.
Your lender must document all the details of your loan so you know the amount of principal, interest and all fees involved including loan points. There are two types of points. A loan origination fee, sometimes called origination points, is paid to your lender for getting you the loan. Discount points are, in effect, pre-paid interest to lower your long-term interest rate.
Your county and city may levy taxes on your real estate property. You’ll also be required to carry hazard insurance to protect your home. Mortgage lenders will collect the taxes and insurance each month with your mortgage payment. These collections are placed in escrow, a depository account that the lender manages.
Tip: Keep in mind that there may be other costs included in your payment. Private mortgage insurance (PMI) is required on most loans with less than 20 percent down payment to compensate the lender for default. Owners of condominiums will pay homeowners association (HOA) dues to cover the cost of building operation, maintenance, repairs and sometimes utilities.
Closing and other costs
In any real estate transaction, you have closing costs — some covered by the buyer and others covered by th seller. Examples of buyer closing costs would include escrow fees, appraisal and inspection fees, prorated adjustments for property taxes and HOA dues. Each party in the transaction could pay all their own closing costs, but sometimes deals are negotiated in which one side pays some or all of the other side’s costs.
After listing all the different costs associated with the purchase, the mortgage loan and the escrow, don’t forget to consider and budget for the indirect costs. Your new home may need improvements like new carpet, paint, counter tops, or any number of other expenses. A “fixer-upper” if accepted “as is,” will of course, cost more.
The mortgage process doesn’t have to be an ordeal if you avoid these red flags and follow these steps to get approved.