Q: Why was my loan rejected, even though I have an excellent credit score?
A: Credit scores are one of many factors an underwriter uses to evaluate a loan profile. Here are some of the key factors that could affect your loan approval:
• Debt ratio. This is calculated using total monthly payments divided by monthly gross income. Total monthly payments include housing payments (principal, interest, property tax, insurance, HOA dues) plus any other monthly liabilities such as credit-card debt payments, auto payments, student loan, alimony/child support and any other monthly payments. In general, if the debt ratio is above 50 percent, you will most likely be rejected. For jumbo loan products, lenders will want a lower debt ratio, around 38–43 percent.
• Credit history. Not only are credit scores important, credit history is equally important. New immigrants who have a short credit history may not be able to qualify for a conventional loan. People who have had bankruptcy or foreclosure within the past seven years may not be able to qualify for certain loan programs, even if their credit scores have significantly improved. A 30-day-late mortgage payment or rental payment within the past 12 months could disqualify a borrower for a home loan.
• Employment history. Typically, lenders would like to see that borrowers have been employed for the past two years, with consistent income and job stability. If the borrower is a contractor or has been self-employed for less than two years, most lenders will reject the loan. If the borrower has had job gaps during the past two years, it will be evaluated on a case-by-case basis. Some lenders require the borrower be back to work (in the same line of business) for six months before they qualify for the loan.
• Reserves. Besides down payment and closing costs, lenders want to make sure that borrowers have sufficient reserves. The amount of reserve requirement varies depending on the loan size, credit scores, and loan programs. The bigger the loan size, the more reserve is required. The lower the credit scores, the more reserve is required. Many lenders allow 60 percent of retirement funds and 70 percent of investment funds to count as reserves; others may require cash reserves. Many borrowers are disqualified for certain loan programs due to lack of sufficient reserves.
Alicia Zhao is a mortgage consultant. Since 2002, she has successfully guided over 1,000 people toward home ownership through personal mortgage planning. She can be reached at AliciaZ@finetsaratoga.com.