Q: Why Would My Lender Deny the Home I Want to Purchase?
A: When you purchase a home, you likely take out a loan (mortgage) to make the purchase. The bank evaluates you as the buyer and the home you’re looking to purchase.
We all know the bank wants to be sure you can (and will) pay them back the money they lend you to purchase the home. That’s the you part of the equation. Here’s a quick list of what they look at:
- Cash – What does your full portfolio of assets look like? Not just cash, but investments, savings and other properties you own
- Credit – What’s your history with credit? Have you used it responsibly and kept your usage within reason?
- Capacity – How much can you reasonably pay back? This is where they look at your income and your debt-to-income ratio to see what you’re currently in process of paying back/committed to spend monthly in relation to how much money you have coming in.
- Collateral – In the simplest terms, this is where the bank wants to know what you have to settle the debt if you don’t pay. Typically, this is the home you’re buying.
As part of that last part, collateral, they also want to know the property they’re helping you buy is, among other things, valuable and protected. And this is where they evaluate the home you’re buying.
- Valuable – Is it worth the amount they’re lending you? This is where the appraisal comes in to play and leads to about 12% of sales being terminated, according to the August 2021 REALTORS® Confidence Index Survey from the National Association of REALTORS®.
- Protected – Does the property have proper insurance to protect your lender against any losses? Without proper insurance (flood and property insurance), the lender might deny your purchase. If the home is in a Homeowners Association (HOA) or a condominium, that could add additional restrictions, requirements and challenges to their approval of the property.
Sometimes, you’ll find that there can be reasons a bank might approve you for the loan amount, but then you hit a snag during the buying process – that they won’t approve the home you’re wanting to purchase.
Seem odd? Not really. When you think about your home purchase and your loan, you’re asking the bank to lend the money to you. But you’re also putting the home up as collateral for your purchase. If the bank were to believe the collateral is not worth the amount their lending or not properly protected, they might deny the purchase.
Ultimately, to get your mortgage for your home, the bank has to approve both you and the home that you’re buying.