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Excellent Credit, Denied Mortgage

This article was written by in Real Estate and Home. 12 comments.


Even with a credit score above 800, it’s still possible to be denied for a mortgage. Looking at the mortgage industry as a whole, for a period of time, lenders were too lax, offering mortgages practically regardless of qualifications. The pendulum has swung the other way, and even qualified individuals and families are having a difficult time receiving credit.

A recent story on CNN followed a potential new home owner whose credit score was excellent. Within days of closing, the lender he had been working with denied his mortgage application. He had a strong income from last year the business he owned, but that was preceded by a year of lower self-employment income during which time he was getting his business off the ground. The year before he established his business, he had a higher income from another company. The most likely explanation for declining his mortgage was his income instability. Even though most recently, his income would qualify him for the mortgage, the lender didn’t like pattern the past few years.

The story ends well; the potential borrower found another lender who was willing to extend a mortgage offer.

I used to think there was an equilibrium between interest rates and home prices. On general, interest rates would decrease while home prices increase, and interest rates would increase while home prices decrease. This would mean that, for the most part, the benefit of buying a house in one aspect would be countered by a drawback in the other aspect. Any timing would be good timing. Today, however, home prices are low and mortgage interest rates are low. This would appear to make a better market environment for buying a house, but fewer people seem to be able to take advantage of the situation due to tighter standards.

With my self-employment, I am concerned that I, too, will find it difficult to qualify for a mortgage with great terms. If I wait longer, buying a house with cash might be an appropriate option, and it may be the only option for someone like me, whose only income is generated through a business that is rather risky. I recently signed another one-year lease for my apartment, a great place to live, but I also paid an additional fee for an option to break the lease within the next twelve months, an likely action.

CNN Money (video with commercial, unfortunately)

Updated July 28, 2014 and originally published July 11, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar Money Beagle

I’ve been through two mortgages and one re-fi, and in all three cases they were in periods where lenders were happy to get the business. I’m pretty confident I’d qualify for anything I applied for but stories like this make you think that maybe it’s not a sure thing.

Things like this have to be happening all over the place and you have to imagine it’s one reason that housing is still soft. Seems lenders have gone from not cautious enough to overly cautious.

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avatar Ceecee ♦53 (Newbie)

You can have great credit even with spotty or lower income. I guess banks are not willing to take a chance on anything or anyone right now. I’m surprised they grant mortgages at all, when even a person with good income could lose their job tomorrow!

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avatar EriK Martin Miller

We had the same issue… we both have great credit, but because we were missionaries supported by donations, we were considered self employed and the banks told us we needed at least three years of income as missionaries. We were so sad, but are blessed to still be an apartment :-)

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avatar SteveDH

I’ll be back….. Responsibility came back. Liar loans were a result of the banks and mortgage brokers being able to pack up anything and everything into instruments they could sell off quickly, i.e. they had no skin in the game. That market disappeared. The bust resulting from these deteriorating underwriting standards coupled with the failure of the rating agencies to provide due diligence in that market has precipitated a big swing in the other direction. Just like the fellow in the CNN story, you and Erik need to present your case up-front and personal with the banks. Don’t be satisfied with the immediate rule-based response, find a manger that can see the forest and has the leeway to make a judgment – not just a decision.

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avatar cashflowmantra

The pendulum has swung the other way from loose credit to tight credit which is not surprising following a period of such excess. But it hurts the little guy who did nothing wrong.

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avatar skylog ♦368 (Nickel)

good point! it is not that we did not know it was coming, but i wonder how this will alter the market going forward.

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avatar wylerassociate ♦162 (Cent)

My credit score is in the mid 700s and i’m planning to buy a house in the next 12-18 months. I’m curious to see if my bank denies my mortgage application.

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avatar Jenna, Adaptu Community Manager

Another reason why a person with good credit might be denied depends on what kind of house they want to purchase. Some of the “fixers” and uninhabitable and therefore harder to secure a loan for.

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avatar No Debt MBA

When we went through the process of applying for a mortgage the bank told me I’d need three years of tax returns as a sole proprietor (or business, or self employed) to have my income considered for the loan. Instead we only used my SO’s income and our combined assets on our application and were approved though the loan value was below $200k. You should be fine should you wish to apply since your business has been incorporated and profitable for more than three years now, if I remember correctly, and you should be able to produce tax returns for those years. Worst case you can ask for or go to a small bank that specializes in manual reviews of mortgages instead of the automated calculator that most banks run you through.

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avatar Cejay ♦1,521 (Half-Dollar)

When we got our loan years ago the mortgage industry was not as great as it has been in the past and not as bad as it is now. We had to explain everything including why hubby took a job making less money than his last job. Thankfully, we got our mortgage and were never late to my knowledge. We even paid it off early. Good luck to your Flexo and I know you will get a house if you want one.

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avatar shellye ♦107 (Cent)

I just closed on a home loan two weeks ago and the hoops I had to jump through in terms of paperwork and documentation, were outrageous and obnoxious, despite my stellar credit score. The times, they have changed, in the mortgage industry. I still don’t understand why the banks are sitting on so much of the bailout money instead of lending it to help grow this economy.

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avatar qixx ♦1,890 (Half-Dollar)

I don’t think i’ll be jumping through those hoops any time soon. I was just running a few mortgage caculators and the results were not as favorable as i’d hoped. One of them even was unable to return results (saying i’d likely be denied). Good thing i was not actually looking to buy right now.

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