Top 10 Reasons Loan Applications Are Rejected

As interest rates rise and rising housing costs swell lenders' portfolios with riskier loans, lenders will tighten underwriting rules making it tougher to buy a home.

Still -- in hot markets and in cool ones -- the fundamentals apply.

Getting a loan application approved is often knowing how to keep lenders from saying "no." To that end, here are the Top 10 reasons loan applications wind up the circular file. There are more, but these top the list.

10. Being in denial about what you can really afford. Apply for too much and you could be out the door faster than you went in. Let the lender decide what you can afford to borrow. From that, you decide what your budget will realistically let you afford to pay each month Get preapproved with a bona fide, carved-in-stone preapproval that guarantees in writing a loan amount, interest rate and as much of the other loan terms as possible.

"It makes your offer more attractive to sellers," said Jeff Lyons, general manager of RealEstate.com a Charlotte, NC-based subsidiary of LendingTree, LLC.

9. Poor preparation. Get all your docs in a row. The more information you have available at application -- proof of income, investments, assets, debts, tax returns for the self-employed, even addresses, current and past -- the more complete the loan officer's analysis can be in a more timely manner.

"A thousand and one little things go a long way toward ensuring the client has a good experience," said Bill Emerson, Livonia, MI-based Quicken Loans' CEO and co-author one of eight co-authors of the new "Homebuying By The Experts" (Quantum Leaves Publishing, $14.95).

8. Misunderstandings. You may need loan programs explained. Industry jargon about an "index," "margin," "T-bills" and other terminology is familiar to real estate and mortgage professionals, but likely not you. Your loan representative can help you with any terms you may not be familiar with, you can visit many online glossaries or pick up one of many real estate mortgage books, virtually all of which contain a glossary.

7. Not realizing you are self-employed. First-time buyers who are self-employed (which can include working at home, being paid by commission only, or owning 25 percent or more of a business) often need to show tax returns as a proof of income. Communicate your employment status before the loan hits the underwriting process and avoid snags later.

6. Over looking property repair problems. Government loans on homes in need of repair need to come with instructions explaining who is responsible for repairs and when. Ask the loan representative for assistance.

5. Third party vendor problems. Credit reports and appraisals typically come through on time but other documents -- tax returns, home inspections, investment reports -- may require extra early efforts to get them to the table on time.

4. Lack of understanding about the loan process. A working knowledge of what happens during the processing, underwriting and closing of a loan is crucial. Understanding time frames, documentation and the responsibilities of all parties is also key.

"Despite our efforts to simplify the mortgage process, it is still a very complicated process," said Emerson.

Lyons advises, "Make sure that you get a Good Faith Estimate of your closing costs to ensure that you understand everything that will be paid at closing. This document will also be a great reference when closing arrives to make sure everything is as it should be."

3. Undocumented explanations for credit problems. Check your credit report before you apply for a mortgage. You need to know before the lender about errors you can correct, problems you may need to explain, and delinquencies you can clean up.

2. Unverified closing funds. If your loan requires funds from you to close (down payment, gifts, cash to keep the loan from exceeding 80 percent of the value, etc.), you may have to show bank statements or documents that prove how long the funds have been in place, the source of the funds, your asset level, etc.

"Do not be afraid to read the closing documents and statements carefully. Whether buying or selling, you've got a lot on the line with these documents and want to make sure that the figures are correct and as agreed," said Lyons.

1. Poor communications. There are many parties involved in a residential real estate transaction -- buyer, seller, real estate agent, mortgage banker, home inspectors, appraiser, attorney and settlement or escrow agent -- and each must have complete understanding of what is going on at any given time. A good loan representative, broker or real estate agent will help keep the lines of communication open.

"A lack of communication is the number one reason deals fall apart based on 15 years in the business," says Rob McCarthy a senior mortgage planner with American Family Funding in Campbell, CA.

"An agent fails to let the lender know there is Section I work to be completed. The client fails to tell the lender they just got laid off. A large percentage of the down payment is a gift that has not been seasoned for 60 days. All of these can be resolved as long as everyone is communicating and not making assumptions that everything will be okay," said McCarthy.