How to Understand the Loan Approval Process and Get a Mortgage Loan
My mortgage application was rejected the first time I ever applied for one. It was a very crushing experience. A mortgage is usually the biggest investment you can make in your lifetime, and it can be a life-affirming decision, especially as the head of a household. The truth is that a lot of people just aren’t ready for the responsibility, and have no idea what to expect in the loan approval process.
Rejection and Preparing for the Loan Approval Process
About 12 million people applied for mortgages in the United States in 2015. Barely 7.5 million of those mortgage applications were approved. The average 60-day delinquency rate for mortgages is about 2%. So, from this basic estimation, imagine about 150,000 people on the verge of foreclosure.
Life can get that serious, and very quickly if you apply for a mortgage without preparation. Being determined to acquire a mortgage because you believe you are a good person and deserve it, isn’t usually enough. Such rationale and self-reasoning have nothing to do with home ownership.
My mortgage rejection was the result of a low credit score. To be honest, I was also living beyond my means and just couldn’t really afford it. It’s better to self-assess your own financial situation honestly than to assume a mortgage you can’t afford. Being rejected for a mortgage isn’t the end of the world. The most important thing is to find out why you were rejected and learn from it.
A History of Bankruptcy and Debt
When you apply for a mortgage, your finances are an open book to a lender. A mortgage lender can see if you have a bankruptcy declaration in your past. Unpaid tax liens will also be visible via a credit search. A bankruptcy filing or a tax lien can stay visible on your credit report for a decade or longer. Rather than declare bankruptcy or get too far behind, it’s smart to try and take out a debt consolidation loan that will allow you to make smaller payments each month to just one company.
Your history of timely and delinquent debt payments will show up on your credit history as well. Ask yourself: why would a mortgage lender approve an application with a lengthy history of delinquent debt payments? How would a history of delinquent payments inspire confidence in the applicant’s ability to make monthly payments over a 15 or 30-year period?
Further, imagine how a bankruptcy filing might look to a mortgage lender. Bankruptcy is a legal status to protect financial solvency against an inability to pay a growing stream of unpaid bills. Mortgage applications are often rejected because of an applicant’s history with bankruptcy and debt.
Another major deciding factor in your mortgage application process will be your credit score. A FICO credit score is a risk probability determination that a lender can associate with an applicant. The lowest FICO credit score is 300, while 850 is the best score. The higher your FICO credit score, the more likely a credit card company or mortgage lender will approve your application.
For a mortgage lender to approve your application, your FICO credit score should be over 640 – at the very least. Take it from me. If you are applying for a mortgage with a poor credit score, you are wasting your time as well as everyone else’s.
Mortgage Approval Can Happen With Time
As with all things in life, taking a long-term approach may be the best. Ask the lender why your application was not approved. Then, delay applying for a mortgage application until you can rehabilitate your financial history. Take a year or two, or more, to slowly fix anything negative in your credit history.
Apply for new credit and use it responsibly. Create a new credit history that displays your new record of timely payments to contrast with your past. When you apply again, a mortgage lender can take your new, improved history into account, and help you throughout the remainder of the loan approval process.
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business