Chris  Schmidt
Chris Schmidt
Owner/Broker

What Negatively Affects Mortgage Approval?

Wondering what negatively affects mortgage approval? If you’re planning to buy a home in Houston, understanding the factors that can negatively affect the mortgage loan process is essential to ensuring a smooth and successful application.

In this blog post, Houston realtor Chris Schmidt and the professionals at Your Home Sold Guaranteed Realty - Chris Schmidt Team will discuss eight factors that negatively affect mortgage approval.

Key Takeaways:

  • One of the most critical factors to get a mortgage is your credit score. Lenders typically look for a credit score of at least 620, with higher scores opening doors to better loan terms and interest rates.
  • The DTI ratio compares your monthly debt payments to your gross monthly income. Generally, lenders prefer a DTI ratio below 43%, although some may go up to 50% with compensating factors.
  • Multiple credit inquiries from applying for new credit in a short period can temporarily lower your credit score and raise concerns about your ability to manage new debt.

What Negatively Affects Mortgage Approval?

Poor Credit Score or Credit History

One of the most critical factors to getting a mortgage is your credit score. Lenders typically look for a credit score of at least 620, with higher scores opening doors to better loan terms and interest rates. A poor credit score or limited credit history negatively affect mortgage approval because it signals to lenders that you can’t manage debt responsibly. 

For example, missed payments, high credit card balances, and defaults can all significantly lower your score. Additionally, if you have a thin credit profile, meaning you have few or no credit accounts, lenders may view you as a high-risk borrower.

To improve your chances of mortgage approval, work on building a solid credit history by paying your bills on time, reducing debt, and correcting any errors on your credit report.

High Debt-to-Income (DTI) Ratio

Lenders use your debt-to-income (DTI) ratio to determine your ability to manage monthly payments and repay borrowed money. The DTI ratio compares your monthly debt payments to your gross monthly income. Generally, lenders prefer a DTI ratio below 43%, although some may go up to 50%, depending on the lender and what kind of loan you’re applying for.

A high DTI ratio indicates that you have too much debt relative to your income, raising concerns about your ability to afford the mortgage payments. To lower your DTI ratio, pay down existing debts, avoid taking on new debt, and consider increasing your income if possible. Monitoring and managing your DTI ratio can significantly enhance your mortgage approval prospects.

Insufficient Income

Lenders need to ensure that you have a stable and sufficient income to comfortably afford the mortgage payments. In Houston’s competitive housing market, it’s especially crucial to demonstrate a steady income stream. If your income is too low or your employment history is unstable, it can negatively impact your approval chances.

Lenders typically require proof of consistent income for at least two years, whether from employment, self-employment, or other sources. If you’re self-employed or have irregular income, providing additional documentation, such as tax returns, profit and loss statements, and letters from clients, can help strengthen your application.

Undisclosed Debts or Liabilities

Failing to disclose all outstanding loans, debts, or financial obligations on your mortgage application is considered fraud and a significant red flag for lenders. Full disclosure is crucial, as lenders need an accurate picture of your financial situation to assess your repayment capacity.

Undisclosed debts can lead to the lender rescinding the mortgage offer or denying your application altogether. Always be transparent about your financial obligations, including student loans, car loans, credit card debts, and other liabilities. This transparency helps avoid surprises during the underwriting process and fosters trust with your lender.

Large, Unexplained Deposits

Lenders scrutinize large, unusual deposits in your bank accounts as potential signs of undisclosed income, new loans, or attempts to mislead about your assets. These deposits can raise concerns about your financial stability and the source of your funds.

To mitigate this issue, document and explain any large deposits to your lender. Providing proof of the deposit’s origin, such as a gift letter, sale of an asset, or tax refund, can alleviate lender concerns and ensure your application proceeds smoothly.

Recent Credit Inquiries

Multiple credit inquiries in a short period can temporarily lower your credit score and raise concerns about your ability to manage new debt. Lenders may view numerous recent inquiries as a sign of financial distress or overextension.

Before applying for a mortgage, avoid opening new credit accounts or making significant credit applications. Keeping your credit inquiries to a minimum helps maintain your credit score and presents you as a low-risk borrower.

Low Down Payment Amount

A small down payment, typically less than 20%, increases the lender’s risk exposure and may require mortgage insurance, which some lenders view as a negative. A larger down payment reduces the loan amount, lowers monthly payments, and demonstrates your financial commitment to the property.

If possible, aim to save for a down payment of at least 20% to improve your mortgage approval chances. However, 10% to 15% is also a good amount. Depending on your circumstances, down payment assistance programs can help you achieve the necessary amount without depleting your savings.

Recent Major Purchases

New auto loans, excessive credit card spending, or major purchases just before applying for a mortgage can negatively impact your debt ratios and credit utilization. These actions increase your debt burden and can lower your credit score, making you a less attractive candidate for mortgage approval.

To enhance your approval prospects, avoid significant financial changes or purchases in the months leading up to your mortgage application. Maintaining financial stability and demonstrating responsible credit use are key to securing favorable loan terms.

Call or Text Chris Schmidt Today to Get Your Mortgage Loan Process Started!

Your Home Sold Guaranteed Realty - Chris Schmidt Team. What Negatively Affects Mortgage Approval?
Chris Schmidt

Chris Schmidt is the owner of Your Home Sold Guaranteed Realty – Chris Schmidt Team. He has 20+ years of experience in real estate and is deeply familiar with the Houston housing market. He’s a member of the Houston Association of Realtors and has earned the Graduate, Realtor Institute designation from the National Association of Realtors.

He began his real estate career in 2004, when he joined Coldwell Banker United as a broker associate. He worked as a broker associate for over 10 years before deciding to begin his own real estate and mortgage lending team.

If you work with Chris Schmidt and the agents at Your Home Sold Guaranteed Realty – Chris Schmidt Team, you’ll have nothing to worry about on your home purchase or sale of your home. We’ve received numerous 5-star reviews from past clients who loved working with us. Clients value working with our team because we always take the time to understand their real estate goals and learn about what’s most important to them.

Faster

  • Get pre-approved in minutes
  • Closings on average in 20 days or less

Cheaper

  • 1% and 3% down options
  • Borrower Assistance Programs
  • Savings that average over $9,400 versus large banks and retail lenders

Easier

  • User-friendly technology allows you to track the status of your loan throughout the process

To Discuss Your Home Sale or Purchase, Call or Text Today and Start Packing!