There are several reasons you could be turned down for a mortgage loan. Mortgage “rejection” can happen when a borrower has too much debt, too little income, or a low credit score. In this article, we will focus on credit-related problems and how to avoid them.
If you get turned down for a home loan based on your credit score alone, you should ask how far out of bounds you were. Ask the mortgage lender what the minimum credit score is for loan approval. You want to know how much work you have to do, in terms of boosting your score.
Also keep in mind that these requirements vary from one lender to the next. Every bank and mortgage company has its own unique underwriting process, protocols and standards. There is no industry-wide standard for minimum credit scores. It varies.
Based on these differences in loan-approval criteria, it’s difficult to say exactly what score you would need to get approved for a loan. But I can give you some average numbers based on current trends within the lending industry:
* If your score is 620 or above, there is probably a lender out there that is willing to work with you. This is the lowest acceptable score for many lenders these days (though it’s not set in stone).
* The more you can boost your score above 620, the better your chances are of getting approved.
* In order to get the best interest rates available today, your score will need to be even higher — probably 750 or above.
So there are essentially two tiers when it comes to credit scores and mortgage loans. You’ll need a certain score just to qualify for financing. You would need an even higher score to get the lender’s lowest rates. This is an important distinction to keep in mind when shopping for a loan.
Note: These are not hard-and-fast rules. They are commonly used standards. Some lenders will work with borrowers who have scores below 620, if they are well-qualified in other areas such as their debt and income levels.
So let’s sum up some of the key points we’ve discussed. You can be turned down for a mortgage loan based on several factors. This can happen when your credit score is too low, or when you don’t make enough money relative to the amount you want to borrow. Some people get rejected by lenders because they are carrying too much debt, relative to their income level. This is referred to as a debt-to-income ratio, and it’s one of the key qualifying factors used by lenders today.
If you get turned down for a loan, be sure to ask why. Try to get as much information as possible from the bank or mortgage company. It’s in their interest to provide these details, because it helps you make improvements wherever needed. Then, later on, you might end up applying for a loan through that same lender. And possibly getting approved the second time around!
In the meantime, you can focus on improving your credit score if it’s too low for a mortgage loan. Pay all of your bills on time. This is one of the most important factors when it comes to boosting a score. Your “payment history” weighs more than any other factor. Reducing your credit card balances could also help you improve your score, especially if you are near your limits or even “maxed out” on one or more cards.