Mortgage application denied! 10 reasons unrelated to your finances

Richard Barrington | Improvement Center Columnist | August 30, 2012

Your credit history is good, and you make a decent income -- so getting approved for a mortgage should be a lay-up, right? Not necessarily.

Your financial situation is only part of what determines whether a mortgage application will be approved. There are plenty of other issues that can stand between you and a home loan. The following is a list of 10 non-financial factors that can prevent a mortgage from being approved:

  1. Lenders don't have dream houses. Beauty may be in the eye of the beholder, but the loan appraiser's opinion matters more than yours. You may be willing to pay a little extra for your dream house, but if the appraiser doesn't agree with your idea of the property's value, don't expect a loan to be approved unless you are willing to pony up a large enough down payment to bring the loan value comfortably below the appraised value.
  2. Bad company. As noted above, the lender's appraisal usually determines how much you can borrow, and this can be a big problem in neighborhoods where there has been a rash of foreclosures. The distressed sale of those foreclosed properties can drag down the area price comparisons against which the appraiser evaluates your intended purchase. If that's the case, you may want to start hunting for a foreclosure sale yourself and take advantage the bargains.
  3. ID, please. If you are an immigrant, a lender can insist that you prove your permanent residency status, and some lenders might even refuse to lend to non-U.S. citizens.
  4. Good fences don't always make good neighbors. If there is a property line issue, or any question about the property's title, don't expect a mortgage approval until the issue is resolved. This can be complicated if a fence or other structure is on the wrong side of a disputed property line.
  5. Coming up to code. Building codes can be excruciatingly detailed, and enforcement is often in the hands of very picky inspectors. Don't expect to get a mortgage on a property with outstanding code violations.
  6. Are you experienced? Your income may readily qualify you for the size of the loan you are seeking, but a lender may still turn you down if you lack a steady enough employment history or a sufficient tenure in your current career.
  7. Lenders don't like nonconformity. Even if you can qualify for a non-FHA loan, you may find it more difficult to get a mortgage on a property that doesn't conform to FHA standards. Why? Because lenders fear the re-sale value of the property could be compromised in the future if the property cannot qualify for an FHA loan. Lenders are concerned with re-sale values; the property is their collateral on the loan, something they would have to sell in the event of a default.
  8. Howdy, neighbor! Being close to your neighbors is nice, but not too close. FHA standards require that adjoining properties, such as townhouses, have a wall extending from foundation to roof as a separation between the properties.
  9. You can't get there from here. FHA standards also demand that the property must be readily accessible by a public road, or that a permanent easement is in place where access is via a private road.
  10. Don't drink the water. Plumbing can also be a factor in loan approval. FHA standards demand that the property must be supplied with drinkable water, and that it must have adequately sanitary sewage facilities. These requirements can particularly threaten homes that are "off the grid" -- i.e., those that are not linked to municipal water and sewage systems -- often the case with rural properties.

If you are having trouble with a mortgage application, the first thing to do is identify the cause of the problem. Start by determining whether the problem is with you, or with the property. If it is with the property, you'll need to decide whether it's something a renovation can remedy. If there is a fix to be made, you should be able to get the seller to take care of it on the basis that other potential buyers would probably run into the same problems getting a mortgage.

If there is something wrong with the property that can't be fixed, then it's probably time to move on and look for another house. In that case, the mortgage lender may have done you a favor by preventing you from getting into a property with a problem that won't go away.

About the Author

Richard Barrington has over 30 years in experience in financial services. Over the years, Barrington has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.Prior to beginning his investment career Barrington graduated magna cum laude from St. John Fisher College with a BA in Communications in 1983. In 1991 he earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the "CFA Institute").