Knowing why you have been denied a mortgage loan will help you learn about your financial situation. The reason behind loan denial is usually included in a refusal letter by a lender, so you can take corrective actions to re-apply. Even if you’ve been denied once, it doesn’t signify you will be rejected in the future.
The most common reasons why loan applications are denied
There are various reasons why an applicant is rejected, but the most prevalent ones are:
Debt-to-Income(DTI)
Unfavorable debt-to-income is a pervasive reason mortgages are dismissed. According to research, DTI is responsible for 32% of all mortgage loan denials. After high debt-to-income ratios, you might have a low credit score.
Credit Score
A low credit score is second on the list of reasons for mortgage denials. Mortgage denials based on low credit scores account for about 26% of all rejections.
What is DTI?
The overall DTI ratio is calculated as your monthly loan payments total. This includes payments for credit cards, auto loans, student loans, alimony, and current mortgages.
When calculating your expenses, divide the sum of your spending by your gross monthly income. Although there might be some considerable flexibility, lenders generally desire a DTI of at least 36%.
Why is the DTI ratio so important to lenders?
The maximum debt an individual can take on before running into financial difficulties is an essential consideration for lenders. Therefore, banks use the DTI to assess how much money they can borrow based on their earnings and other factors.
Also, DTI is viewed as a significant risk factor by lenders. You are not a good borrower in the eyes of the lender if you have excessive debt or insufficient income. At the very least, you would add additional expenses to an already stretched budget.
Steps to mend DTI denial on a mortgage
You must take specific actions if your DTI is above what is required by a lender. All you need to do is:
Decrease Monthly Loan Payment: Find a solution to decrease your monthly loan payments first; it would be ideal if you could expand your income simultaneously.
If you have a high DTI, you should start by paying off your highest interest debt. Credit cards are a common indication of this.
Pay Off Loans: By raising your DTI, you can gain in several ways. For instance, paying off debt could improve your credit score and free up some of your income.
You can get a variety of benefits by improving your DTI. Paying off debt, for example, might raise your credit score while also releasing part of your earnings.
Review Your Credit Score: Moreso, low credit scores are a significant factor in most loan denials. Therefore, before you even think about submitting a mortgage application, spend some time reviewing your credit report. Lenders will take into account both your credit score and history.
For the best interest rates, lenders prefer to engage with clients who have credit scores of 760 or above. Of course, other criteria than your DTI and credit score are taken into consideration by lenders when deciding to grant you a mortgage.
Be ready to provide evidence of your financial stability, a down payment, and cash reserves to gain access to the loan of your choice.
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