You probably aren’t surprised to read that your credit scores have the ability to make or break your new mortgage loan application. And, your income and debt burden can greatly impact your chances of receiving loan qualification, as well. Yet it typically takes more than decent credit scores or even an acceptable debt-to-income ratio to qualify for a loan.
Lenders, especially mortgage lenders, consider many different factors when determining whether or not the risk of doing business with you is acceptable. One such factor lenders consider is a review of not only your credit scores, but a review of the information contained in your credit reports, as well. If your credit reports contain issues considered to be "red flags," your loan application could get denied even if your credit scores are high enough to satisfy the lender's minimum qualification standards. Let’s review the top four reasons why your mortgage loan application may be denied.
1. Bankruptcy on Credit Report
A bankruptcy on your credit reports, especially one which has not yet been discharged, could potentially cause problems when you apply for a loan. When you apply for a mortgage after a bankruptcy filing, you will most likely face a mandatory waiting period before you may be eligible to qualify for a new home loan. Post-bankruptcy waiting periods could vary based on the type of mortgage for which you are applying (FHA, VA, USDA, Conventional, etc.). Most of the mandatory waiting periods are typically between two to four years, though you might be eligible for an exception to qualify sooner if you can prove certain "extenuating circumstances."
2. Foreclosure on Credit Report
A foreclosure or a foreclosure-like event (short sale or forfeiture of your deed in lieu of a foreclosure) appearing on your credit reports can also potentially cause you problems during a loan application. If you plan to apply for a mortgage after a foreclosure or foreclosure-like event, you may be faced with a mandatory waiting period similar to those required by mortgage lenders after a bankruptcy. Again, the waiting period may vary based on the type of loan you are applying for, but it can sometimes be as long as seven years.
3. Compliance Condition Code on Credit Report
The Fair Credit Reporting Act (FCRA) gives you the right to dispute information on your credit reports. However, if you apply for a mortgage in the middle of disputing an item on your credit report, you could potentially have a difficult time qualifying for the loan.
When you submit a dispute, a "compliance condition" code (aka, a dispute code) is added to the disputed item on your credit reports. The code will show up on your report with a notation that reads something along the lines of "Consumer disputes, investigation in process." When the dispute code is present on your reports, it can potentially lead to temporarily elevated credit scores because credit scoring models may ignore certain aspects of the disputed account. As a result, your mortgage lender may require that the dispute code be removed from your credit reports, ensuring that they are seeing your true credit scores prior to approving your loan application.
4. Cosigning a Loan
If you co-signed for another person's debt, the full debt will likely show up on your credit reports just as if it were yours alone. Not only does the account have the ability to impact your credit scores, but your lender will also have to count the debt whenever your debt-to-income ratio is calculated. In fact, it would be smart for you to consider any co-signed debt to be your debt because, from a liability perspective, there’s no difference.