5 New Barriers to Getting a Mortgage

Over the years, mortgage lender requirements for getting approved for a mortgage have changed. If you’re looking to finance the purchase of a home, it’s important to understand the credit standards, credit score, and income requirements. However, some factors, such as uninformed and inexperienced lenders, can impact your odds of approval. Discover five barriers that can prevent you from getting approved for a mortgage loan.

Key Takeaways

• When applying for a mortgage loan to buy a home, it’s important to understand the lender’s credit standards and requirements.
• Lenders scrutinize employment and your income sources, particularly if you get paid in cash or have a second job.
• Mortgage lenders also review your credit history, credit score, assets, and debt.
• Choosing an informed and experienced loan officer is critical in the mortgage approval process.

Lender Paranoia

Tight lending standards of banks and mortgage lenders can create a barrier to getting approved for a mortgage. Mortgage lenders naturally want to avoid past mistakes, so it’s not surprising that they would scrutinize an applicant’s financial situation. These reservations initially began following the subprime mortgage crisis of 2008, which led to the Great Recession.

Although much has improved since those days, some mortgage lenders remain cautious. Greg Cook, a licensed California real estate broker and mortgage banker, says that it used to be easy for lenders to get their loans insured by the FHA or guaranteed by Fannie Mae. Only in the case of fraud would these organizations require lenders to repurchase a mortgage.

“Now, if FHA feels the lender didn’t follow guidelines, they can refuse to insure, and the lender has to pony up the cash to replace the funds on their warehouse line,” Cook says. “Multiple buybacks can bankrupt a small lender.”

Lenders face responsibility for the loans they originate, making them cautious in approving borrowers.

Restrictions on Eligible Income

A lack of income can be a barrier to getting approved for a mortgage. If you earn income from a second job, the income can provide much-needed breathing room in your monthly budget and stability to your finances. However, some lenders may not consider this income or require proof of lengthy employment when making a credit decision.

Orange County, Calif., realtor Wendy Hooper says, “Income from a second job is generally not allowed unless it has been derived from the same source for 12 months or within the same exact field for 24 months without any more than a 30-day interruption. And it is usually not allowed at all if it is not documented on a W-2.”

Unfortunately, many people receive the income from their second job in cash. Even if you deposit the cash in your bank account and declare the extra income on your W-2, lenders may not be willing to consider this income.

According to Cook, “Lenders are now requiring all bank deposits that are not direct deposit payroll be verified. In our previous life, if the borrower’s income supported deposits… explanations weren’t required. Because it’s virtually impossible to verify cash deposits, loans are being denied.”

Tighter Income-Verification Standards

Tighter income standards can also be a barrier for some borrowers in getting a mortgage, particularly if they have nontraditional income.

Lenders scrutinize any income that borrowers want to be considered in their ability to repay a loan. There are no stated-income or low-documentation loans anymore. Those with nontraditional income, like self-employed borrowers, may face more hurdles and need to provide more documentation.

Also, lenders’ fears about cash deposits mean that people who work in an industry where being paid in cash is common, such as the restaurant business, might have trouble getting approved. Parents who are expecting should also proceed with caution, as a New York Times article pointed out.

Amy Tierce, certified mortgage planning specialist with Wintrust Mortgage, says that lenders are cautious because “often, babies are born, and parents have a change of heart about working full time or working at all.”

She says that borrowers on maternity leave need to validate that they are on paid leave; borrowers not on paid leave can buy before the delivery while their income can be verified, buy when they are back at work, or try to qualify on one partner’s income.

Tierce, who has been in the mortgage business for 20 years, explains, “Guidelines such as the one cited in the Times piece have been on the books forever.” However, buyers had more options to get around this guideline in the past.

Greater Scrutiny of Credit Reports

Your credit score and credit history can prevent a borrower from getting approved for a mortgage. Even if you get preapproved, don’t let your guard down. If you take any action affecting your credit score or credit report, you must explain it to your lender.

Kevin C. Miller, the president and CEO of Dallas-based TexasLending.com, says, “Clients have to write letters for all inquiries on credit that may show up after they apply for a home loan and the loan will now wait to close until the client can prove they have taken on no new debt due to the inquiry.”

Borrowers who want their mortgage approval to stick shouldn’t open any new accounts or miss any payments. They shouldn’t make any large purchases or close any credit card accounts. Lenders must rerun borrowers’ credit reports immediately before closing, and any changes since the time of application can create challenges.

According to Cook, if you have to use a credit card, even for a tank of gas, you should pay off that amount immediately. “Because credit scores are not static and many loan programs have minimum credit scores, a slight drop in scores, maybe due to activity, could result in an approval turning into a denial,” he says.

Uninformed and/or Inexperienced Lenders

An inexperienced lender may prevent you from getting a mortgage loan. If you want a mortgage, don’t pick just any old loan officer: find one with expertise. Tierce says, “The biggest issue for a consumer is to work with a good loan officer who really understands the realities of today’s market, and who will know and prepare the borrower on what to expect… a good originator will ensure that there are no surprises that will kill a transaction.”

An easy way to get a sense of a loan officer’s expertise is to ask them a few questions.

• Can they articulate their responses clearly, or are they talking in circles?
• Do their answers address your questions?
• Are their explanations detailed or vague?

Asking a trusted family member, friend, co-worker, or real estate agent for a referral to a loan officer also remains a good way to find someone who knows what they’re doing.

Important

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report, either to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).

What Credit Score Do You Need to Get a Mortgage?

Mortgage lenders typically require a minimum credit score of 620 to approve a conventional mortgage. However, borrowers with credit scores below 620 may get approved but may get charged a higher interest rate.

How Can I Increase My Chances of Getting Approved for a Mortgage?

Make sure you have a good credit score and work on improving it if needed. Pay off any current debt, and don’t take on new debts. Try to cut down some expenses to ensure you have enough income to cover the mortgage payment and all the related expenses (like taxes and property insurance).

Save enough money to cover the closing costs and the downpayment. Finally, work with a local mortgage advisor who can help you set and achieve your goals.

How Many Mortgage Applications Are Denied?

According to the Federal Reserve Bank of New York, the average rejection rate of mortgage applications in 2023 was 12.1%, a decrease of 2.5 percentage points from 2022 but above the 2019 rate of 10.2%.

What’s the Main Reason People Get Denied a Mortgage?

One of the main reasons borrowers get denied a mortgage is an unfavorable debt-to-income ratio (DTI), followed by a low credit score. The DTI ratio consists of your monthly debt payments divided by your gross monthly income. DTI is considered a solid risk indicator by lenders, who don’t want to see too much debt or inadequate income. Mortgage lenders typically require a DTI ratio below 33% to 36%.

The Bottom Line

Lending standards can appear tight, making it challenging for qualified borrowers to get approved for a mortgage. If it happens to you, don’t be surprised and don’t take it personally. By working with an experienced lender, being patient, and improving your credit and financial situation, you can put yourself in a position to get approved for a mortgage.

Read the original article on Investopedia.