Reasons a Mortgage Loan Application Might Get Denied

A Home Buying Article Contributed by Elizabeth Fox-Wise

Reasons a Mortgage Loan Application Might Get Denied

The largest fear when applying for a mortgage loan is that you will be turned down. If your mortgage loan application is denied, Federal law requires that the lender tell you why your application was turned down. Once you know why your mortgage loan was rejected, you might be able to fix the problem and reapply. There are a lot of reasons that a loan application might not be approved. Here are a few of the more common ones.

Mortgage Loan Denied Because of Insufficient Income or down Payment

Perhaps the most common reason for mortgage loan denial is that the applicant is not showing enough income for the size of the mortgage that he is requesting. Or that his income to debt ratio is too high - with too much debt for the amount of income. If the monthly expenses are at or below the level of the income, then the applicant would be considered too high of a risk for a mortgage loan.

Another common problem seen in mortgage loan applicants is insufficient funds for closing costs and a down payment on the property that you are applying for a mortgage loan on.

If either of these things are the reason for your mortgage loan application being denied then you might want to consider mortgage loan programs designed for lower income borrowers with lower down payment requirements.

Another Common Reason for Mortgage Loan Denial is Low Appraised Value of the Property

If you are applying for a mortgage loan at more than 95 percent of the appraised property value of the house that you wish to purchase, then your mortgage loan application may be denied.

This is not uncommon during a sellers market such as right now. Because interest rates are so low on home mortgages, the nationwide average is that most houses are selling for 20% above the appraised value. Unless the buyer is paying that 20% in his down payment, the mortgage loan lender might not grant a mortgage of that size. This is because he knows that the housing market turns around and has peaks and valleys.

He also knows that if the interest rate falls in six months, the value of the house will be back down to the appraised value. So to grant a mortgage loan at more than the appraised value increases the lender's risk level.

If you are turned down for your mortgage loan for this reason there are a few things you can try to do. As mentioned above, if you have the means, you can absorb the price difference in your down payment. You can also try to renegotiate with the seller for a better purchase price on the house. If you feel that the appraiser undervalued the property request the lender examine the appraisal.

Bad Credit History is the Third Most Common Reason Mortgage Loans are Denied

If your mortgage loan is turned down because of a bad credit report, you have a right to request a free copy of the report. Examine it to make sure there are no errors. If there are, fix them and reapply.

If you do have bad credit history, you might have to wait awhile and work on building your credit rating before you reapply for a mortgage loan or consider a cosigner.