Five potential red flags on your mortgage application
It's that tense waiting period: You've filled out your Uniform Residential Loan Application and sent it to your mortgage loan officer. You've made copies of your tax returns, paycheck stubs and bank statements, and sent them to your lender, too.
Now you're waiting -- waiting to see if your lender has any questions and if you'll qualify for the mortgage you seek.
You hope your tension is unwarranted, and that your mortgage application will sail through the underwriting process. But there are potential trouble spots that will make underwriters hesitate before approving your loan. If your application is dotted with any of these potential issues? You might receive that rejection you're dreading.
What are the most common trouble spots that mortgage lenders find with loan applications? Here are five of them. Any of these issues could sink your application.
1 - Credit issues
When you fill out your loan application, you give your lender permission to pull your credit score. If your score is too low – say a FICO score under 640 – you'll face an uphill struggle to get your loan application approved (FICO is the most commonly used credit scoring system). And if you do, you'll be stuck with a far higher interest rate.
Ideally, you want a FICO credit score of 740 or higher. That is considered a top score, and will give you the lowest mortgage rates.
Michael Metz, a loan officer with V.I.P. Mortgage in Scottsdale, Arizona, said that credit issues are by far the most common issue he finds with borrowers' applications.
"Credit tends to be the number-one problem that home-loan applicants face, and many times they don't even realize it, particularly if they had a bankruptcy, divorce or a bad year in their past," Metz said.
The solution? Borrowers should order one free copy of each of their three credit reports – one each maintained by the national credit bureaus of Experian, Equifax and TransUnion – each year. They can access these reports at AnnualCreditReport.com. Once they get these reports, borrowers should study them for errors.
Borrowers may also wish to obtain at least one of their FICO credit scores – again, each of the three credit bureaus maintains a separate score on consumers – before they apply for a loan. Many banks and credit cards currently provide with their updated FICO score free of charge. Otherwise, you'll need to order it from one of the three bureaus, which will cost about $15.
2 - A debt-to-income ratio that is too high
Elysia Stobbe, branch manager with the Jacksonville, Florida, branch of NFM Lending and the author of How to Get Approved for the Best Mortgage Without Sticking a Fork in Your Eye, points to high debt-to-income ratios as common trouble spots on loan applications.
As its name suggests, the debt-to-income ratio focuses on the relationship between applicants' monthly debt obligations and their monthly income. To determine this ratio, lenders divide applicants' monthly debt obligations – including minimum required credit-card payments, student loans, auto loans and the estimated new mortgage payments that borrowers will have to pay each month– into their gross monthly income, their income before taxes are taken out.
For instance, a borrower with $3,000 worth of monthly debt obligations and a gross monthly income of $7,500 would have a debt-to-income ratio of 40 percent. Lenders today want borrowers to have debt-to-income ratios of no more than 43 percent. If your ratio is higher than that, you might be facing a rejection.
"One of the most frequent issues I see is that the buyers are at the top of their debt-to-income ratio when their new home payment is included," Stobbe said.
The solution? Stobbe said that the obvious one is to buy less home, which will give you a smaller mortgage payment each month. You could also pay down other debts, targeting, perhaps, that credit-card debt that you've built up.
3 - Large undocumented deposits
Greg Fischer, vice president with Pinnacle Mortgage Corporation in Manchester, New Hampshire, cringes every time he sees a loan application from borrowers who've made large deposits in their savings or checking accounts but can't document from where that money came.
For instance, borrowers might receive $10,000 from a relative to help them cover a down payment or mortgage closing costs. But they don't have a gift letter from that relative explaining that the deposit is a gift and not a loan that has to be repaid.
That gift letter is important: If the $10,000 is a loan, lenders have to include the repayments as part of borrowers' monthly debt obligations. If it's a gift that never has to be repaid? Then lenders won't include it as part of borrowers' debt-to-income ratios.
"Where are these deposits coming from?" Fischer asked. "Sometimes people deposit their gift funds and their paychecks into their accounts at the same time. That makes it even harder to document the gift funds. Undocumented income is one of those last-minute surprises. You're all ready to go and 'whoops' there's a problem."
4 - Last-minute purchases
Another common problem that Fischer sees? Borrowers who make big purchases after they submit their loan applications but before their loans officially close.
Those new purchases can throw off borrowers' debt-to-income ratios and possibly scuttle an application that otherwise would have been approved, Fischer said.
Say borrowers have a debt-to-income ratio of 42 percent, just under that 43 percent limit. After they submit their loan applications but before their loan closes, they finance a new car. That car comes with a monthly auto-loan payment of $500. That extra $500 might push their debt-to-income ratios over 43 percent and into trouble territory.
"Before you do anything that you haven't always been doing, anything that breaks your normal pattern of buying and spending, talk to your mortgage professional first," Fischer said. "Many times, that loan officer will say 'Go ahead. Do it. It won't hurt.' But if it is something that will cause issues, the lender needs to know about it."
5 - Fluctuating overtime or bonuses
Matt Hackett, operations manager with New York City-based direct mortgage lender Equity Now, said that many applicants want to use their bonus or overtime income when applying for a mortgage loan.
There is a challenge here, though: Lenders will want to see two years of overtime and bonus information. If this extra income fluctuates too wildly – high one year, low the next – it could cause problems for borrowers.
“One year you might have $30,000 worth of overtime. Another, you might have $10,000. We can’t just use $30,000 as the overtime figure you can expect to earn each year,” Hackett said.
Say your base salary is $50,000 a year, but last year you also made $30,000 in overtime. If you only made $5,000 worth of overtime the year before, your lender won’t allow you to count your qualifying salary as $80,000.
“Borrowers are often unaware of the two-year history that goes along with overtime or bonus income,” Hackett said.