Why Am I Not Getting Prequalified?
When you’re ready to find a Lehigh Valley home, either for the first time or because you’re ready to move, you know the value of having a mortgage prequalification or preapproval in hand before you start shopping the local listings. But what should you do if a lender declines to prequalify you for a mortgage? You can talk to other lenders or brokers to see if you have other options. However, it’s best to look at why a lender might say you’re not able to get prequalified and instead look for ways to improve your borrowing power.
Getting prequalified is a great first step to buying a home. If you’ve been turned down, it’s ideal to know about it now and not later, after you’ve found a house to buy and are ready to make an offer. Here’s what usually goes into mortgage prequalification denials and what you can do about yours.
Mortgage Prequalification and Mortgage Preapproval
Before you start house shopping, you’ll likely consider getting prequalified or preapproved for a mortgage. These are two very different steps but are both designed to help potential buyers know their borrowing power ahead of time.
The prequalification process is a less formal, unofficial, and soft inquiry review of what you might be able to borrow when buying a home. During the mortgage prequalification process, you don’t have to provide any documents per se. You only need to disclose details about your income, debts, and credit history without completing an application or pursuing a loan directly. Securing a prequalification will usually only take a few hours or so.
The preapproval process is the more formal, official, and hard inquiry into what a lender will actually give you in terms of a home loan. This step involves proving financial history, employment, and credit details, along with the completion of a loan application. This amount is an official loan amount you could get and will only be “good” for a certain amount of time. Securing a preapproval could take up to ten days.
What You Need to Get Prequalified
Because mortgage prequalification tends to be the less formal of the two pre-mortgage verification steps, you won’t necessarily need to bring supporting documents with you. The lender will, however, require you to disclose certain details about your financial situation to gauge how much borrowing power you might have during your house hunt.
Have some realistic numbers in mind before you connect with a lender. Know your credit score and history, with explanations for any negative marks that might show up there. You’ll also need to discuss your household income, including your frequency of pay and steady work history. A lending agent might also ask you to summarize the value of any assets you have, including investment or retirement accounts, vehicles or other property you own, and bank account balances. It’s also ideal to have a rough estimate of outstanding debts you currently have across loans, credit cards, or otherwise.
Since mortgage prequalification relies on self-reporting and is more of a soft assessment of your borrowing power, you can also look to use a prequalified mortgage calculator to see how much a lender might consider prequalifying you for a loan. Nerd Wallet offers one that will prompt you to provide the following details:
- Annual Income
- Preferred Mortgage Term
- Preferred/Going Interest Rate
- Credit Score Range
- Verification of 2-year Employment History
- Are You Saving for a Down Payment?
- Have You Experienced a Foreclosure?
- Monthly Recurring Debt Payments
Using this calculator, even as a best guess, will provide you with an idea of what a lender might officially prequalify you for and your monthly payment on that amount.
Reasons a Lender Might Say No
A lender might tell you no for a number of reasons. And remember, it’s not an official no to a loan since you’re only discussing lending options at this point. But it is recommended you heed the decline as an opportunity to explore what might need to be improved on your end before you officially move forward with a preapproval or a loan application directly. If you’re not able to get prequalified, you likely won’t be able to get preapproved either.
Here are some red flags that a lender might suggest being problematic, meaning you won’t be prequalified for a mortgage:
- Recent change in employment
- Insufficient income
- Disclosed issues with your credit history
- A poor credit score
- Excessive debts incurred
Again, these suggestions on soft inquiry details you provided unofficially. So, if any of these areas of contention are actually better than you discussed, you might be able to prequalify. However, when you’re honest with your lender about these details, and you should be, the lender will be serving your best interest by telling you what areas of your lending ability will need a little work before securing your home loan.
What You Can Do to Improve Your Situation
If you’ve been told you can’t prequalify for a mortgage, it could be a good thing. Without going through the more complicated loan application process or dinging your credit with an inquiry, you'll know precisely where you stand financially and can now take steps to improve your borrowing power. Start by assessing any red flags or reasons the lender said might hinder your chances of securing a mortgage. Here’s how you can make improvements based on the most common declines.
Job Change: You can’t do much to improve your job history if you’ve recently taken a new job. You can, however, ask to secure statements in your new role confirming projected earnings. You can also put together a past history of steady work that led up to this recent job change to support your claim of reliable, ongoing work and income.
Insufficient Income: If the lender doesn’t think you make enough money to prequalify for a mortgage, you can, of course, look to create new revenue streams for yourself. You might also explore adding co-signers or additional borrowers to the loan who do have more robust earnings.
Credit History: If you have delinquent payment marks or collection agencies on your credit history, you’ll want to take steps to have those items removed. Any accounts you’ve paid in full that might still appear on your report can be requested formally to remove to the reporting bureaus.
Credit Score: Lenders will all be different when gauging a credit score. If your score itself is deemed too low for mortgage prequalification, you can look for ways to improve it by paying off smaller debts, paying down balances, and closing unused accounts. You can also explore the various types of mortgages, with assistance for low-credit-score borrowers, like FHA loans, USDA loans, or VA loans.
Too Much Debt: A lender might decline you for a mortgage prequalification because you’ve disclosed having too much debt or outgoing payments every month. To improve your debt-to-income ratio, look to pay off any smaller debts entirely. You might decide it makes sense to consolidate your debts or sell off property or assets that contribute to your monthly expenses.
Be patient. Some of these improvements are going to take time, in some cases months, to turn around in your favor. Remember, it’s going to be better for you in the long run if you can be in the best financing position before attempting to buy a Lehigh Valley home. Don’t rush it if you can create a timeline to make improvements that might benefit you later.
Getting Serious About Home Buying
Once you’ve had a chance to make some changes to your finances, you can always go back to the lender and discuss prequalification with those improvements. And because prequalifications are still estimates and not hard inquiries, you can shop around with various banks and brokerages to discuss your options. When you are able to secure mortgage prequalification, you’ll typically receive a “prequalification letter” that you can then share with your real estate agent or property seller to demonstrate your seriousness about buying. It won’t carry the same emphasis or weight as a preapproval, but it will certainly signal to the sellers that you’re financially prepared to make an offer that will likely be approved.
With your mortgage prequalification in hand, you can then reach out to one of the Homeway Real Estate agent professionals to help you start looking at Lehigh Valley properties for sale. Because you’ll have a loan amount in mind, our agents will make sure to narrow your search to only those properties that can realistically fit your budget.
Have your mortgage prequalification letter? Let Homeway Real Estate start finding your dream home!