What Can Stop You Getting a Mortgage?

A mortgage is a substantial financial commitment. Lenders thoroughly assess a borrower’s capacity to meet repayment obligations, which helps mitigate their risk. Understanding the criteria lenders use is important for anyone seeking to finance a home purchase, as various factors can significantly impact a mortgage application’s outcome, potentially leading to delays or denial.

Your Credit Profile

A borrower’s credit history and score are primary factors in mortgage approval, as lenders examine this profile to determine reliability. Higher scores indicate lower risk. While some loan programs accept scores in the lower 600s, conventional lenders often prefer 620 or above, with favorable terms often reserved for those with scores of 740 or higher.

The components contributing to a credit score include payment history, amounts owed, length of credit history, types of credit used, and recent credit inquiries. Consistent on-time payments demonstrate financial discipline. Lenders also scrutinize credit utilization (revolving credit used compared to available limit), preferring this ratio below 30% to avoid appearing overleveraged.

Specific credit issues can significantly hinder mortgage approval by signaling increased risk. Late payments, loan defaults, or accounts sent to collections negatively impact a credit score and raise lender concerns. Significant judgments, bankruptcies, or foreclosures indicate severe financial distress and require substantial time before mortgage qualification. Applying for multiple new credit accounts in a short period can also suggest financial instability and lead to denial.

Your Financial Obligations

Lenders analyze a borrower’s income stability, employment history, and existing debt levels to assess repayment capacity. A key metric is the Debt-to-Income (DTI) ratio, comparing monthly debt payments to gross monthly income. This ratio has two components: a front-end ratio (proposed housing payment) and a back-end ratio (all monthly debt payments, including housing).

Many lenders adhere to the 28/36 rule: the front-end ratio should not exceed 28%, and the back-end ratio should remain below 36% of gross monthly income. DTI calculations include minimum credit card payments, car loans, student loan payments, and existing mortgages or rent. A DTI ratio exceeding these thresholds often indicates a borrower may struggle with additional mortgage payments, leading to denial.

Consistent employment history is a significant factor, with most lenders preferring at least two years of stable employment in the same field. Verifiable income is paramount, requiring documentation like recent pay stubs and W-2 forms for salaried employees. Self-employed individuals need two or more years of tax returns to show consistent income. Unstable employment, frequent job changes, or a probationary period at a new job can signal instability, challenging income verification and making lenders hesitant to approve a loan.

Your Available Funds

The cash a borrower has available for a down payment and financial reserves substantially impacts mortgage approval. A sufficient down payment reduces the loan-to-value (LTV) ratio, making the loan less risky for the lender. Minimum down payment requirements vary by loan type, with government-backed loans like FHA requiring as little as 3.5% and conventional loans often seeking 5% to 20% or more.

Beyond the down payment, lenders often require borrowers to demonstrate “reserves.” These are liquid assets, such as savings or investment accounts, remaining after down payment and closing costs. Reserves are measured in months of mortgage payments, serving as a financial buffer for unexpected events like job loss. The specific amount of reserves required varies by loan program and borrower profile.

Lenders have strict requirements regarding fund sources, emphasizing “seasoned” money (in the borrower’s account for 30 to 90 days). This confirms funds are genuinely the borrower’s and not from undisclosed sources. If a down payment is a gift, a formal gift letter is usually required, stating funds are not a loan. Cash advances or loans from non-family sources are not acceptable.

The Property Itself

Even with a strong financial profile, property-related issues can prevent mortgage approval. A common hurdle is when the property’s appraised value is below the purchase price. Lenders only finance based on appraised value, not the contract price. The borrower must cover any difference in cash to proceed, and this discrepancy can halt a transaction if the buyer cannot bridge the gap.

Certain property types or conditions can render a home ineligible for standard mortgage financing. Properties in poor structural condition, with unpermitted additions, or significant safety concerns (e.g., environmental hazards, code violations) may not meet lender requirements. Unusual property types, like those in rural areas with limited comparable sales, certain condominiums, or unique zoning, can be deemed too risky or difficult to appraise. Lenders need the property to serve as adequate collateral.

Problems with the property’s title can prevent clear ownership transfer, a prerequisite for mortgage approval. Issues like unreleased liens, clouded titles, or boundary disputes create legal complications. Title insurance protects the lender and buyer from such claims. Unresolved title defects will lead to mortgage denial until rectified.

Application and Documentation

Accurate and complete information during the mortgage application process is paramount. Lenders rely on submitted data to assess risk and determine eligibility. Errors or omissions can lead to significant delays or denial. All financial information, personal details, and property specifics must be consistent across submitted documents.

Common issues include missing required documents, such as bank statements, pay stubs, tax returns, and employment verification letters. Each document corroborates application information, and its absence can disrupt underwriting. Lenders are thorough, often contacting employers or financial institutions to confirm details.

Inconsistencies between submitted documents or stated information can raise red flags. Discrepancies between income reported on tax returns and pay stubs, for example, require detailed explanation. Misrepresentation or fraudulent information, intentional or accidental, results in immediate denial. Borrowers should avoid major financial changes, like opening new credit lines or making large deposits, during underwriting, as these complicate verification.