Can you guess the TOP two denial reasons for mortgage apps? Why are people rejected for financing on their new mortgage application?
Know these two words before applying for your new mortgage application!
Credit and Income. Fortress Home Mortgage suggests all potential borrower’s research both words before applying for a new mortgage. Why you ask? Because in 2018 these were the two pitfalls that led to mortgage denials across the country.
Understanding how CREDIT and INCOME play a pivotal role on your mortgage app BEFORE you apply will make the process go much more smoothly! Click here and allow Fortress Home Mortgage to help pinpoint your DTI and FICO.
Lending underwriters are very keen folks that know exactly what to look for on mortgage applications. And, it’s pretty simple; the borrower’s documented income and credit score.
Based on a recent survey, more than half of potential home buyers believe they would not qualify for a new home loan.
Fortress Home Mortgage directs its clients on how to successfully apply for a new home loan. Apply with us and your chances of getting approved for financing will go up!
We have the experience and understand mortgage underwriting guidelines. Borrowers can think of Fortress Home Mortgage as pseudo-underwriter. Or, an experienced mortgage professional that will unravel the “surprises” on your mortgage app before they happen.
In the following paragraphs we’re going to pass along some helpful tips on how to improve your credit (FICO) score, and debt to income ratio (DTI). Do so, and you’re likely to see lower rates and a more affordable loan overall.
And, remember it is always important to keep an eye on the interest rates! Click here and allow Fortress Home Mortgage to shop the current market for the best rate offers from multiple lenders.
CREDIT: low credit (FICO) scores = 34% of mortgage applications were denied in 2018
CoreLogic, recently released its 2018 data by way of the Home Mortgage Disclosure Act, and the numbers reflect 34% of purchase mortgage applications were denied due to credit reasons.
So, what exactly is a low FICO score?
First it’s very important to realize that the scoring model used on a mortgage pulled credit report is more scrutinizing than a “free” credit report.
Secondly, the “middle score” is what lending underwriters determine to be your FICO score. In other words, there are three credit reporting bureaus; Experian, Trans Union, and Equifax. All three bureaus report each individual score on your mortgage credit report. The “middle score” (or FICO), is the score that falls between the highest and lowest.
For example: Experian = 680 / Trans Union = 700 / Equifax = 679
Can you guess the middle score? The answer is EXP @ 680. The above scores are average to above average, and a borrower would have no problem getting approved based just solely on these scores. Unfortunately, as the data suggests not every borrower carries scores in this range.
The # 1 suggestion to increasing each bureau score is by continually making on-time payments for your established trade lines. Bar none, paying on time with consistency is the key to strong credit scores. And, you only need to focus on paying the MINIMUM amount due each month. If you can do this for any length of time, such as 12 months or longer, than your credit scores will be in great shape! Keep in mind, timely payment histories on credit reports account for 35% of the scores.
Additional tips and reminders for strengthening your credit:
- Pay the MINIMUM amount due every month on all open trade lines
- Maintain all balances of open trade lines at/or below 30% of the high credit limit
- Keep the hard inquiries to a MINIMUM; credit cards; auto loans; home financing. You should only have a hard inquiry unless absolutely necessary. Typically, one to three per year at the very most.
Fortress Home Mortgage offers its clients a feature called Credit Boost. This is NOT to be confused with “credit repair.” Click here for more details on our Credit Boost program.
The purpose of Credit Boost is for clients that would like to increase one or all three bureau scores with a short time frame of a week or less.
Credit Boost is a program whereby Fortress Home Mortgage will pull a tri-merge credit report. Once all three scores are known then we get into a simulator that will tell us how much your score will improve based on future actions. For example, we can declare a debt to be paid in full, or a collection account to be deleted from the record. The simulator will then tell us the anticipated score improvement. The actions are then documented, the bureau(s) are updated, and bingo the score(s) are updated!
INCOME: excessive DTI = 37% of mortgage applications were denied in 2018 due to excessive debt to income ratio
Ah yes, the debt-to-income ratio or DTI% is the amount of a borrowers monthly debt divided by their gross monthly income. We’ll show you some examples, but for now keep in mind the following key points:
- Monthly Debt. The underwriter goes off of the open trade lines on your credit report; such as charge cards, auto payments, and student loans. Utilities, luxury expenses, food and gas, are items that are not counted
- Gross Monthly Income. The underwriter will average the gross W2 wages for 24 month average. If using overtime it must be reflected for this amount of time.
- Maximum DTI %. The “maximum DTI” for FHA loans is 55% and the “maximum DTI” for Conventional loans is 45%. These are the two most popular loan programs for new home buyers (purchase) and existing home owners (refinance).
How to figure out your DTI%
It’s fairly straight forward: take the sum total of the gross monthly debt and divide it by the gross monthly income.
- Example DTI: the monthly debt on your credit report is $1500 dollars and your gross monthly income is $10,000 dollars; the DTI = 15%
- Example front end / housing DTI: the proposed housing payment is $2500 dollars and your gross monthly income is $10,000 dollars; the DTI = 25%
- Example back end / total DTI: the proposed housing payment + monthly debt is $4,000 dollars and your gross monthly income is $10,000 dollars; the DTI = 40%
It’s important to note that the items such as garnished wages and child support can affect the overall ratios. Basically, any payment reflected on your paystub will be counted against the gross monthly income!
Follow these suggestions to improve your DTI
You will hear the phrase, “location, location, location” as the three most important aspects to the value of a home. On the side of mortgage applications the three most important aspects to your DTI% is, “budget, budget, budget.”
In other words, there are steps you can take in advance to improve your DTI. Here are five simple ways to better your DTI%:
- Eliminate credit card debt or payoff any existing balance(s)
- Do not establish any new credit card debt
- Add a non-occupant co-signor (ie family member or relative)
- Remove your spouse from the loan app if she/he a disproportionate amount of debt versus verifiable income
- Restructure all of your high-interest debt into one charge card with a lower rate and payment
Keeping your monthly debt at a minimum is something all borrowers can control. For example, try to drive a car that is suitable to your style while being affordable to your wallet. If you’re leasing this can be accomplished. However, if you bought the car than the payment will likely be a lot more and this will affect how much you can borrow for a new home. Remember, you don’t want to “drive your house.”
Are mortgage guidelines static?
Mortgage guidelines apply to all borrowers. Everyone must pass the same thresholds, but it’s not a one size fits all exercise. Every loan app is unique just like every person is unique. There is leeway with every guideline and there are preventative measures that can be taken to ensure the best outcome. DTI percentages and FICO scores can be moved around, and an experienced loan officer will help his or her borrowers game the system, but no one gets a free ride! At the end of the day it’s a pass or fail test and a borrower must have the documentation to support the loan application. Additional home buying resources can be found here:
Take the initiative and lower the risk of denial on your mortgage application!
Folks it’s pretty simple: Contact Fortress Home Mortgage and find out how your mortgage credentials stack up!
One painless conversation with us will change the way you think about your hard earned money. We go beyond just taking your loan application by providing you with VALUABLE information on how to be a successful borrower, build wealth, improve your buying power, and pay less interest to the bank.
Anyone can dress up and play the part, and unfortunately that is exactly what happens with many of the larger retail national brands. We live the part and would love to earn your trust.
John Sarkisian is the owner and top producing mortgage loan officer for Fortress Home Mortgage. For more information on this or any other mortgage related topic email John.