Mary Cummins, Real Estate Appraiser, Animal Advocates, Los Angeles, California

Mary Cummins, Real Estate Appraiser, Animal Advocates, Los Angeles, California
Mary Cummins, Real Estate Appraiser, Animal Advocates, Los Angeles, California

Sunday, July 4, 2021

Main reasons home loans, mortgages are denied. It's not the appraiser. - by Mary Cummins

main reasons mortgage home loans denied, mary cummins, los angeles, california, real estate, home loan, 

Here are the main reasons mortgage loans are denied. It's not the appraiser or appraisal. 

1. Debt to income ratio (37.2% denial rate).

Your debt to income ratio (DTI ratio) should be no great than 43%. You can improve this by paying off debt, reducing interest rate on debt or renegotiating debt to lower the monthly debt payments. Your net assets (total assets minus liabilities) still factor into the loan so make sure the debt balance doesn't increase too much when you lower the rate or payment. 

Another thing they consider is your monthly housing cost ratio which is (monthly housing costs / monthly income). "The top ratio is calculated by dividing your new monthly mortgage payment by your monthly gross income. Typically, this ratio should not exceed 28%. The bottom ratio is equal to your new monthly mortgage payment plus your monthly debt divided by your gross income per month. Typically, this ratio should not exceed 36%." 

As a rule of thumb your monthly rent, utilities or mortgage, taxes, insurance, home maintenance, utilities should not exceed 30% of your gross monthly income. If your housing cost is over 30%, you are considered cost burdened and have a high risk of not being able to pay your rent or mortgage. All poor people, people making minimum wage, moderate earners are cost burdened paying over 50-70% of housing costs if they live in Los Angeles or similar areas. Median rent for an average one bedroom is $2,100/month here. Two minimum wage earners working full time can barely afford that if they don't eat much. You should not be buying a home at the moment. Work on increasing your income. I know it's a "let them eat cake" thing to say and I agree. It's not easy for most people.

2. Credit history 34.8%. 

You need a FICO score of 580 to 620 absolute minimum to get a home loan. You can improve this by always paying your bills on time. Make sure you have some little loans like a small balance on a credit card, gas card, department store build credit. Start that at least two years before you try to buy a home. Start with one card only and make payments. After a year add another. Don't apply for a lot all at once. You'll be denied and end up with many inquiries on your credit report which is a big red flag for denial. And remember, the lower your FICO score, the higher the risk to the lender and the higher borrowing rate for you. Get your score as high as possible so you can save money. It's doesn't make sense that poor people pay higher interest rates but it's related to the higher risk for the lender. 

3. Collateral 19.7%. 

Generally the home is the collateral for the loan. You can also use other real estate or assets such as bonds, life insurance or investments. Your parents could cross collateralize their home for your home loan if they love you more than life itself. The total loan to value ratio should be about 80%. This would be about a 20% down payment. If you want to only put down 5%, the risk and cost goes up and you're much more likely to be denied. 

It's possible that the issue was not the appraised value but the fact it needs repairs, has broken windows, is in a flood, wildfire, landslide, hurricane, tsunami ... zone, has unpermitted additions, is over 150 years old, is next door to an oil refinery... If you are doing a low down payment loan, don't buy a fixer. You're more likely to be rejected because you'll need down payment money and the money to fix it. 

4. Other 12.9%

Everything other than what is listed here. The lender just can't discriminate against you based on race, religion, gender... The lender can deny you the loan based on credit, income, assets, liabilities and everything else in this article. That is legal. 

5. Credit application incomplete 8.9%

You'd think this would be a no brainer but it's not. People either don't want to complete the application or just don't. This is only for loan applications which were submitted and not for loan applications which were started but never submitted.

6. Unverifiable information 6.7%

Unverifiable information arises from inaccuracies in an applicant’s employment history or tax records or discrepancies between the application and credit report. This could be from unreported income that doesn't show up on taxes, tax returns which show no real income for years, bank statements which don't match stated income, a loan you paid off which isn't on your credit report, bills you paid which weren't reported or the person is just plain lying on the application or their taxes or both. 

7. Insufficient cash 4.0%

You must have sufficient funds to cover the down payment and closing costs and fees or lenders may deny their application. You generally can't borrow the down payment or fees. Research has shown if someone can't even save for a down payment, they are not credit worthy and there's a higher chance of the loan going under. If you haven't saved enough for a down payment, you're not ready to buy a home. Work on your debts, budget, income and save some money. You should have a 20% down payment and six months worth of monthly expenses saved before you buy a home. You should also meet all the other requirements I've listed here.

8. Employment history 1.8%

Lenders want to see that applicants have worked in the same job for at least two years. They want a stable, steady earner. This also means you can't just get your Uncle Benny to lie and state you worked for him for two years. They need an independent way to verify it usually with W2s, 1099's, bank statements, cashed checks, verifiable tax returns... In the 1980's to 2009 mortgage brokers actually forged tax returns, W2s, 1099's and bank statements or they did no document loans which didn't require them. Those are a few reasons we had three real estate busts during that time. Thanks to Obama and Dodd Frank we are less likely to have another bust because the borrowers are more creditworthy today due to independent verification. 

9. Mortgage insurance denied .1%

"Mortgage insurance protects the lender and allows borrowers making a down payment of less than 20% to still qualify for a home loan. Applicants who are denied mortgage insurance that need it are also likely to be declined for their loan." Mortgage insurance is insurance to pay the monthly Principle Interest Taxes Insurance (PITI) payment if the borrower can't make the payment. It's added to the monthly mortgage payment. As it is mortgage insurance is for high risk borrowers. To be denied that means you are a super crazy high risk borrower. If you're denied mortgage insurance, you are not credit worthy or ready to buy a home. Go work on yourself. Work to increase your income, reduce your budget and expenses, increase your savings and try again much later.

Mary Cummins of Animal Advocates is a wildlife rehabilitator licensed by the California Department of Fish and Game and the USDA. Mary Cummins is also a licensed real estate appraiser in Los Angeles, California.

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