You apply for a mortgage, but your application gets rejected. Suddenly, you’re hit with a wave of embarrassment, shock, and horror. Sadly this is a reality for some home buyers. According to a recent Federal Reserve study, one out of every eight home loan applications gets rejected.
There are a number of reasons mortgage applications get denied, and the saddest part is that many could have been avoided quite easily, had the applicants known certain things. So, before you’re next home buyer who gets burned scan this list and make sure you aren’t making any of these five mistakes that could get your application denied.
You Didn’t Use Credit Cards Enough
Some people think credit card debt is the kiss of death however, it’s also a way to establish a credit history that shows you have a solid track record. While a credit score riddled with late payments can certainly call your application into question, it’s just as bad to have little or no credit history at all. Most lenders are reluctant to fork over money to individuals without a substantial credit history.
According to a recent report by the Consumer Financial Protection Bureau, roughly 45 million Americans are characterized as “credit invisible.” This means they don’t have a credit report on file with the three major credit bureaus.
There is a silver lining for those who don’t have credit established. Some lenders will use alternative data, such as rent payments, cell phone bills, and school tuition, to assess your creditworthiness.
You Opened New Credit Cards Recently
That Victoria’s Secret credit card you signed up for last month? Bad idea. New credit card applications can ding your credit score by up to 5 points.
That hit might seem small, but if you’re on the cusp of qualifying for a mortgage, your new credit card could cause your loan application to be denied by a lender. So, the lesson is simple: Don’t open new credit cards right before you apply for a mortgage. Even if your lender says that everything looks good, don’t open any new cards or spend oodles of money until after you’ve moved in. After all, lenders can yank your loan up until the last minute if they suspect anything fishy.
You Missed a Medical Bill
Credit cards aren’t the only debt that counts with a mortgage application. Unpaid medical bill matter too. When you default on medical bills, your doctor’s office or hospital is likely to outsource it to a debt collection agency. The debt collector may then decide to notify the credit bureaus that you’re overdue on your medical payments, which would place a black mark on your credit report.
If you can pay off your medical debt in full, do it. However, if you don’t have that luxury many doctors and hospitals will work with you to create a payment plan. Showing a mortgage lender that you’re working to repay the debt could strengthen your application.
You Changed Jobs
Mortgage lenders like to see at least two years of consistent income history when approving a loan. As a result, changing jobs shortly before you apply for a mortgage can hurt your application.
Of course, you don’t always have control over your employment. For instance, if you were recently laid off by your employer, finding a new job would certainly be more important than buying a house. But if you’re gainfully employed and just considered changing jobs, you’ll want to wait until after you close on a house so your mortgage gets approved.
You Lied On Your Loan Application
This one seems a little obvious, but let’s face it, while it may be tempting to think that lenders don’t know everything about you financially, they really do their homework well. So no matter what, be honest with your lender or there could be serious repercussions. Exaggerating or lying about your income on a mortgage application, or including any other untruths, can be a federal offense. It’s called mortgage fraud, and it’s not something you want on your record. With mortgages, honesty is the best policy.
