A home is one of the largest investments people will make in a lifetime. There are many factors involved in getting a mortgage to cover the cost. The amount of the down payment, the credit score of the applicant, the value and list price of the house, the current real estate market, and the interest rate are just a few factors.
A Matter of Risk
The final decision will often be based on the total risk taken by the lender. If the loan to value ratio is too high, or if the current income to debt ratio reaches a certain point, approval may be reckless. If there are several late or missed payments in the credit history, the lender is taking a substantial risk by approving the mortgage.
A mortgage is a secured loan, which means the lender can take the home in the event of default. That alleviates some of the risks, but the lender does not want your home. The process of foreclosing on a house and then selling it to recoup as much of the loss as possible takes time and money.
Approval for a mortgage will be denied by most lenders if the applicant has no credit history, a poor credit history, or is self-employed. The risks are considered unacceptable to traditional lenders, such as banks and credit unions. A denial does not mean a mortgage will not be approved by another lender.
What to Do
Those who have been denied a mortgage can still be approved by another lender. Some lenders and brokers specialize in searching the market for lenders that will approve a mortgage under less than ideal circumstances. The interest rate will be higher than mortgages for those with excellent credit, but approval is possible in most cases.
Before searching for a home, spend a year or two paying down current debt and saving for a down payment. Those actions will improve the credit rating, lower the income to debt ratio, and lower interest rates. Chances of approval are greater, and the lender will lower the interest rate depending on the size of the down payment.
It is also wise to get a copy of your credit report to review the information and clear up any inaccuracies. People wishing to purchase a home in the near future, or those who have already been denied a mortgage can learn more about the complexities of a mortgage.