Buying a home is a huge undertaking, and for many Americans, one of life's dreams. There are, however, many things standing between potential homeowners and their mortgage. In a recent study, the Federal Reserve highlighted three key issues that affect home loan rejection rates. By understanding these, you can be prepared and more likely to have their application approved.
- The study found that the main reason for a mortgage application to be rejected is failing the debt-to-income (DTI) ratio test. This ratio is crucially important to lenders. If the DTI is too high, it suggests that you are living beyond your means, which makes approving your mortgage a risky business. If your household has a monthly income of $6,000, for example, and your debts are $3,500, including the new mortgage repayment, the DTI ratio becomes 58 percent. This is far too high. The maximum DTI allowed by the Consumer Financial Protection Bureau (CFPB) is 43%. To solve this problem, you should try to increase your income, reduce your debt, or seek a mortgage with lower monthly payments.
- Another problem indicated by the Federal Reserve study is to do with bad marks in your credit history and a low credit score, for example, if you made late payments in the past that caused your credit score to drop. Another warning sign in your credit history is that your credit utilization rate is too high - again, it's worthwhile paying down debts where possible.
- The final killer for mortgage approvals is a property valuation issue, such as you paying over the market price for a home. Though this is often out of your hands, it is best to avoid engaging in a bidding war with another potential buyer, as this can push the house price far above the true market level.
By addressing these three issues, you can put yourself in the best position to get your mortgage application approved.
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