5 Reasons Why You Can't Get a Traditional Mortgage

Before you apply for mortgage or refinance your home, you should take a close look at your finances. Knowing where you stand financially can help you avoid headaches down the road, should your application get denied. Here are some of the most common reasons why banks and credit unions deny mortgage applications.

1.You have a misconception of your credit score

To get your mortgage application approved, your credit score needs to be a minimum of 620. What many people don't know is that a mortgage lender reviews your credit scores from each of the three major credit bureaus (Experian, Equifax and Transunion). Some consumers will take a look at their score on one report and assume that's the same score the lender is seeing. Instead, the lender will use the average of the three scores to measure your ability to pay back the loan. Also, be aware that your credit score can fluctuate due to the balances on your accounts. The lender may pull your credit score on the 10thand see a different score than what you saw on the 5th. Before applying for a loan, it's important that you stay on top of your credit score.

2.You have no credit history

Some consumers think avoiding credit cards altogether is a good idea, but it can actually hurt you. By establishing your credit, you are showing lenders that you are reliable and can make payments on time. Many lenders will not lend to someone lacking a credit history. If you plan on buying a home, you need to use a credit card to build up your credit.  Find some helpful tips for improving your credit score here.

3.You are self-employed

If you are self-employed, you may have a harder time getting a mortgage. In the eyes of lenders, your income is less stable, and you may not be able to stay on top of your monthly payments. However, just because you are self-employed doesn't mean that you can't get a mortgage. You'll have a better chance of getting approved once your business has been in operation for a two or more years. You can also improve your chances by having a good credit rating, and by demonstrating you have regular paid work (by going easy on the write-offs).

4.You have too much debt

If you have outstanding debt with other lenders, chances are your loan will not get approved. To reduce your debt, make sure you are paying your bills on time and paying more than the minimum monthly payments.

5.You have gaps in your employment history

Long periods of unemployment can also decrease your chances of getting a mortgage. When you apply for a mortgage, the lender looks at your employment history from the past two years. If you have been unemployed for a period of over 6 months, the lender might be skeptical. You should be able to provide a reasonable and logical explanation of your employment gap.

If you are a young borrower who cannot get approved for a traditional mortgage loan, you should consider a seller-financed home from a seller that is willing to carry the paper and act as a private bank. A homeowner can seller-finance his/her home, create a mortgage note and sell it on the secondary market, thus getting their cash much quicker than waiting ten, twenty or thirty years collecting payments and being the bank. By selling a mortgage note, the home-seller receives an ample return on his/her investment, while opening the door for young borrowers with insufficient credit scores to get a mortgage loan and purchase a home. Instead of making payments to the bank as a traditional mortgage would require, the borrower makes payments to the note buyer. This can help you purchase a home and improve your borrowing and spending habits, so you can get approved for a mortgage down the road.