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If you are afraid of being denied an FHA home loan, there are some things you can do to work on your credit to get closer to home loan approval. A consistent record of on-time payments, low debt to income ratios, and good credit scores get you loan approval.

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Why Did I Get Denied an FHA Home Loan?

April 22, 2021

Why Did I Get Denied an FHA Home Loan?
If you are afraid of being denied an FHA home loan, there are some things you can do to work on your credit to get closer to home loan approval. A consistent record of on-time payments, low debt to income ratios, and good credit scores get you loan approval. What gets you denied a mortgage?

Reasons for an FHA Loan Rejection

Your lender is required to do three things in order to justify approving a home loan. These three things are:
 
  • Verify that you have sufficient income and employment to pay for the monthly mortgage;
  • Determine that you don’t have so much debt that you will have difficulty affording both your existing debt and your new mortgage obligation;
  • Ensure you have patterns of responsible credit use that indicate you are a good credit risk for the lender.
If your lender cannot do these three things, your home loan is in jeopardy. What factors contribute to the lender’s decision when reviewing these three areas?

Low Credit Scores

FHA loan rules technically permit loan approval for FICO scores between 500 and 579, with a 10% down payment required. The lowest down payment is offered, under FHA loan rules found in HUD 4000.1, to borrowers with FICO scores at 580 or above. But your lender is free to require higher credit scores than these minimums.

If your credit scores are within the 500 range, you should work on your credit through on-time payments and lowered balances on your accounts to bring your FICO scores higher. Lender standards will vary so you should also be shopping around for a loan. Don’t assume all lenders have the same standards.

Carrying Too Much Debt

Too much debt makes it hard for your loan officer to justify the mortgage loan. If you have a high amount of debt, you should work on reducing your balances and getting your debt to a manageable level. Each lender will have their own standards on how much debt is too much, but if your debt eats up half of your monthly income, you may have difficulty getting a loan approved without compensating factors. Ideally, your debt ratio should work out to be lower than 43% of your total monthly income.

Borrowers Who Apply Without Enough Funds

The debt ratio is a big issue, but there are also expenses associated with a home loan that must be covered, and not all those expenses can be included in the home loan amount. For example, your 3.5% minimum down payment must be paid in cash at closing time and is considered a separate expense from other costs on the loan. That means your appraisal fees and other closing costs will NOT be deducted from the amount of down payment owed on the mortgage.

Borrowers who hoped for a zero-down, no-out-of-pocket costs for the loan transaction will find that planning, budgeting, and saving for a home loan is required.

While there is down payment assistance available for some borrowers depending on the local programs offered near them, that assistance is not available in all areas. Expect to make some up-front payments on your mortgage and save accordingly.

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