The statistics for rejection rates on home loans are now over 30%. Around a third of all home mortgage loan applications are rejected at the first hurdle. This has resulted in a steady increase in the amount of mortgage loans completed by so called “sub-prime” companies in the USA ( currently out of all home loans approved over 34% are issued by sub-prime lenders).
Why is it that some people get their mortgages approved with no problems whereas others often struggle, seemingly having to negotiate obstacles set up by the mortgage finance company, even then not getting the loan they want and having to approach sub-prime lenders with higher rates? What is the difference between a successful application and a rejected one? What are main stream lenders looking for when they evaluate your application?
The reality of the situation is, that getting your home mortgage approved really depends on how closely your circumstances match the criteria set out by the lender. All lenders have a set of “rules” or “criteria” that are used in deciding whether or not to approve a loan. Obviously, all applicants should at least show themselves to be creditworthy and be able to provide documented proof to support this. The FICO score is a popular credit scoring method used by many lenders (but not all – some have their own in-house credit scoring system, although most work in much the same way). The FICO scale runs from 300 to 850. The vast majority of people will have scores somewhere between 600 and 800. Above 720 or so means you will be offered good terms on mortgages, loans and credit cards.
Nowadays all lenders have a credit scoring system for aspects of your background, your credit “score” is derived from your background in the following areas:-
1) Credit History – The next indicator of your credit-score is your existing payment history, i.e. your credit card and loan repayments. if your credit file shows you have been making timely payments towards existing debt then this increases your score. However, too much existing debt on credit cards or loans can obviously count against you. Generally, lenders are most interested in the last six months of payments made, so, if you have had any “hiccups” in last 6 months perhaps you should postpone your loan application and make your credit as clean as possible.
2) Employment background – Generally speaking, for best chance of approval, you should have been in continuous employment for at least 2 years, preferably with same employer but at the very least within the same industry. In the lenders eyes this vastly reduces the chances of you being unemployed and shows some stability in employment – lenders love stability!
3) Existing commitments – Your income dictates the amount of repayments you can support. As a rough rule of thumb, finance companies say that a person’s total monthly liabilities should not be greater than 42% of his or her net monthly earnings. It is worth spending a few minutes checking this out yourself, it could mean that in order to qualify for your mortgage loan, you may need to reduce your monthly repayments to make the proposal acceptable to the lender.
Many lenders now offer a “pre-approved” home loan if you might there standard criteria, the benefits can include a written 120-day commitment which gives you extra leverage to negotiate with sellers with written proof of an approved mortgage amount. It would be wise seek this approval before making any commitments or even viewings to avoid disappointment.