7 Things That Can Keep You From Getting a Mortgage

1. Bad Credit Score

When a mortgage lender receives your application, one of the first things they do is run a credit check. Every lender sets its own minimum credit score requirement, but you'll usually need a credit score of at least 620 to qualify for a conventional loan. The higher your score, the better. As with other forms of credit, lenders typically extend their most favorable terms to applicants with higher credit scores.

Before applying, contact any lender you're considering to learn their minimum credit score requirement and other expectations. Also, remember that federally backed mortgages set their own minimum scores. You could qualify for a Federal Housing Administration (FHA) mortgage with a FICO^® Score^☉ as low as 500 (with a 10% down payment) or 580 (with a 3.5% down payment). Likewise, U.S. Department of Agriculture (USDA) home loan lenders generally require a minimum credit score of 640.

If your credit score isn't ideal, try to improve your credit fast before applying. Start by making consistent on-time payments and reducing your revolving debt balances since those are some of the most important factors in your FICO^® Score.

2. Poor Credit History

Mortgage lenders will also review your credit report to gauge how well you manage credit. They'll look for red flags on your credit report such as a history of delinquencies or collections, bankruptcies or other factors indicating you could present a financial risk as a borrower.

Qualifying for a mortgage can be challenging if you're new to credit or your credit is poor. Some lenders specialize in mortgages for those with bad credit, but you'll likely need to pay a large down payment. Alternatively, you may qualify for a government-backed loan such as an FHA or VA home loan. However, pausing your mortgage efforts while you work on improving your credit could open more options and lower your rates when you're ready to apply.

Consider getting a copy of your credit report to see where your credit stands. You can obtain copies of your credit reports from AnnualCreditReport.com or check your credit score and credit report through Experian for free.

3. High Debt

Another factor that could affect your mortgage approval is a high debt-to-income ratio (DTI). DTI measures the amount of your total monthly debt obligations against your gross monthly income. Lenders use your DTI to determine if you can afford the monthly payments on the loan you're applying for.

Generally, lenders prefer that your DTI fall within their eligibility parameters—more on that in a moment. If you're carrying a high debt balance, you might consider reducing it before applying for a new home loan. You could also choose a more affordable home or save for a larger down payment.

4. Low Annual Income

Debts are one-half of your DTI; the other half is your income. Lenders need to verify you have income sufficient enough to repay your mortgage. They do this by reviewing your income tax returns for the past several years and your most recent pay stubs.

The mortgage lender will typically review your income to see if it meets what's known as the 28/36 rule—two measurements that refer to the front-end and back-end of your DTI.

On the front end, the amount of your monthly mortgage payments, property tax and insurance must be no more than 28% of your gross monthly income. On the back end, the percentage of your gross monthly debts, including your mortgage, can't surpass 36% of your gross monthly income.

5. Inconsistent Employment History

Lenders may consider you a riskier applicant if your employment history is spotty or if you've recently changed jobs. Ideally, lenders want to see a record of stable employment and income. Generally, a two-year history in your current position is preferred, but you may be approved if you're taking on a new position.

It's often recommended to hold off on significant life changes like a job change when shopping for a new house, but that's not always possible. If you do get a new job or promotion, be prepared to submit a letter of intent from your new employer or a title change letter if you're promoted. Also, mortgage lenders commonly request verification of employment letters.

6. Small Down Payment

Another critical factor that could keep you from getting a mortgage is your loan-to-value (LTV) ratio—the amount of your mortgage principal compared to the home's current market value. As a general rule, lenders may approve borrowers with LTV ratios up to 80% to 95%, but the lower your LTV, the better.

Remember, your down payment lowers your LTV, so you're more likely to be approved for a home loan with a 20% down payment than one for 5%. Additionally, you'll have to pay private mortgage insurance (PMI) if your down payment on a conventional loan is less than 20%.

Be mindful of your lender's minimum down payment requirements before applying. Most conventional lenders require a 5% or greater down payment, but some may accept less. You may qualify for an FHA loan with a down payment as low as 3.5% of the purchase price, while VA loans are available with no money down.

7. New Debt Before the Application Is Approved

Lenders could consider you a higher-risk borrower if you apply for or open new credit shortly before submitting your mortgage application. Credit checks associated with credit applications typically result in hard inquiries, which could lower your credit score and make it harder to qualify for a new home loan. Making large purchases with a credit card could increase your credit utilization, which may also have a negative effect on your scores.

Even if you're preapproved for a mortgage, opening a new credit line or making a large purchase on credit can affect your credit, which, consequently, could put your loan approval and escrow closing in jeopardy. Real estate agents and mortgage brokers often advise their clients not to apply for new credit accounts or finance major purchases when taking out a new mortgage or closing on a home.

Tips on Getting a Mortgage

Follow these guidelines to improve your odds of getting a mortgage:

• Check your credit report. Get a copy of your credit report and review it to spot anything that could harm your credit and your chances of mortgage approval.
• Fix any credit issues. Address any issues you find on your credit report that could be dragging down your credit score, including late payments or collections. Remember, if you see credit report information you believe to be erroneous, you have the right to file a dispute online.
• Improve your credit score. High credit score achievers have better odds of mortgage loan approval and receiving lower interest rates. Make timely bill payments, pay down or zero out your credit card debt and take other steps that could improve your credit score.
• Reduce your debt-to-income ratio before applying. Lowering your debt balances and increasing your income can help you reduce your DTI. Aim for a DTI of no more than 36%.
• Submit a substantial down payment. The more you put down on a new mortgage, ideally 20% or more, the more likely you'll be approved for a mortgage with favorable terms.
• Don't make major life changes or expensive purchases on credit. When applying for a new mortgage, don't make significant changes to your financial situation, like switching jobs or making large purchases on credit. Doing so could negatively impact your credit and, by extension, your mortgage application.

Monitor Your Credit When Applying for a Mortgage

Any changes to your credit score could slow down your mortgage approval. With so much on the line, you might consider signing up for free credit monitoring from Experian to help make sure any credit changes don't delay the process. You'll receive notifications of identity fraud, changes to your credit report and other surprises so you can keep a close watch on your credit.