Many reasons can collectively contribute to why a mortgage application gets suspended or even denied. Here are some of the common pitfalls and how to avoid them when applying for a mortgage.
Credit scores and utilizing your available credit
Higher credit scores are very desirable because they will most often result in lower interest rates, and the lower interest rate will have lower mortgage payments. Lenders review the debt to income ratio. They evaluate your ability to afford a new mortgages based on your current credit report expenses added to the new mortgage. Carrying a balance on your credit cards will result in a higher debt ratio and lower the maximum amount a lender will offer. Unfortunate events, such as collections, late payments, tax liens, foreclosures and etc., will certainly lower the credit scores.
Paying off the credit cards at the end of the billing cycle may not improve the credit score. The creditors report how much credit is utilized at the end of the billing cycle which means the balances showing on your statements will be reported to credit bureaus. You can still use the credit cards, but try to pay it down before the billing cycle end date. Avoid maxing a credit card as credit scores may be lowered due to the max utilization. Some creditors report the credit history 1 to 3 months behind. If you are applying for a loan be sure not to make any large credit uses during the approval process and you will save a lot of headaches in the end.
It is perfectly fine to change jobs prior to applying for a mortgage. Lenders verify the employment status during the application process as well as the day before funding the new loan. Changing jobs during these periods one should be very cautious and discuss with your mortgage consultant prior to doing so. The lenders look for repayment stability, having an employment gap of more than 2 weeks without explanation or extenuating circumstances creates red flags.
Large deposits and cash
Lenders will require explanation and paper trail regarding large non-payroll deposits into asset or bank accounts. Be ready to explain and be prepared with documentation. If you have a large sum of cash stored at your home, this will become a red flag during the loan application process and create a big challenge for you to get a new loan.
What to do when your application is denied
There are a few basic steps to follow when your mortgage gets denied.
The first step is to ask what went wrong on your application? The lenders are required to tell you why your application was denied. Discuss ways to fix your application with your mortgage originator, perhaps lowering your debt, or to increasing your income.