Mortgage Red Flags: Property Issues that Could Derail Home Financing

Whether you are buying a home for the first time or investing in a rental home, there is a huge chance that you will need a mortgage to finance that property. Most people who buy real estate don’t do it with their own money because many people don’t have the means to pay cash for a property.

But even for people who have enough money to pay cash for their property, it still makes much sense to use mortgage financing instead of their own money. The reason is simple: using the bank’s money to buy your home means you can keep your own money and direct it to other uses.

That is why access to financing is essential when planning to buy a home. If you are unable to access the financing you need, you may have to forgo your desire to own that home, finance the property with your own money, or find alternative but costlier financing options.

You can avoid this problem if you know the things that could lead a lender to deny you a mortgage. Having this information beforehand and discussing it with an experienced loan officer will prevent unexpected delays and disappointments when trying to get financing for your home.

Here are twelve of the biggest red flags that can derail your home financing

1.     A poor credit score or no credit history

Lenders use your credit score to establish your level of competence in financial matters. Banks view mortgage applicants with low credit scores or no credit history as high risk because such borrowers are more likely to default on their loans.  We offer FHA home loans for credit scores as low as 500 but you will need to put at least 10% down and have good rental history for the past 12 months.  We can also provide FHA financing with NO Credit Scores.

2.     Unexplained income and spending

Unexplained deposits in your bank statement may be flagged as illegitimate income sources. Strange expenses will also raise questions because a lender may suspect you are hiding something. Unexplained expenditure also suggests that you are not in control of your finances.  All large deposits into your bank accounts must be explained and the source of the income documented.  Cash deposits are not allowed.  All forms of income must be documents for at least 12 months with tax returns, paystub, and W-2’s if applicable.

3.     Undisclosed Debts or Liabilities

Hidden debts, such as loans you’re a guarantor for, can pop up during the application process and jeopardize your chances.

4.     Large bank deposits

Large deposits that may have come from someone who will benefit from the transaction – a home seller or estate agent, will raise a lender’s suspicions. Any income suspected to have come from an unacceptable (not necessarily illegitimate) source will be flagged.

5.     Major last-minute purchases

Big purchases, such as a new car, have the potential to alter your DTI ratio and push it above the acceptable threshold. If those purchases are made right after filing your mortgage application, it could lead to the application being rejected.

6.     Gambling transactions

Gambling transactions in your bank statement are a red flag. Lenders will worry that you may divert money for the monthly mortgage payments to feed your gambling habit. It is not a problem if you only have a few gambling transactions in your statement.

7.     High debt-to-income ratio (DTI)

The debt-to-income ratio is how much of your pre-tax income goes into servicing debts. Lenders want to know that you will have enough money to pay the mortgage after you pay your debts. A DTI of 20% is good, but over 45% is risky.

8.    Mismatched Information

Discrepancies between the information on your application and the documents you provide (like different addresses or names) can be a cause for concern.

9.    Incomplete information on your application

Missing information that prevents a lender from getting your complete financial history is a red flag. These could be missing pay stubs, tax information, or identity documents. They may also include unexplained transactions in your bank statement or even spelling errors.

10.  Insufficient Down Payment

The down payment shows your commitment to the home purchase. If it’s too low, it might indicate you’re not financially prepared for homeownership.  However, we offer both USDA and VA home loans with no down payment require as well as our 100% FHA financing option.  Conventional and Jumbo mortgages do require down payments. You can learn about our First Time Homebuyer and Down Payment assistance programs here.

11.  Structural defects in the building

Lenders will not loan you money to buy a house that is not structurally sound. A sagging roof, uneven floors, cracks in the walls, flooring or foundation, as the foundation repair team of Granite advises, since the foundation supports the house, issues with this key component can lead to significant structural problems and any other signs of structural damage in the home are enough reasons for your application to be denied with traditional mortgage financing.  However, with a Renovation mortgage like a FHA 203K or Homestyle Renovation, we can approve your financing for that fixer upper.

12.  Appraisal valuation

If the home is appraised to have a market value below the agreed-upon purchase price, your loan application will not be approved, or the bank may require you to pay the difference between the appraised value and the purchase price as an additional downpayment. That is because the bank knows that in the event of default, it cannot get its money back even if it sells the home.