This May Be Why You Won’t Get the Mortgage Loan You Wanted

More than half of prospective home buyers next year are expected to be first-time buyers, and more than 60% of those first-timers are expected to be under the age of 35. That’s good news for sellers because it could mean some competitive bidding for the house they’re trying to sell.

For buyers, getting a mortgage lender for that first home depends on a several things, the most important of which are whether or not the lender thinks you can afford the monthly payments and your credit history. Nearly a quarter of all rejected mortgage applications (23.4%) are the result of a buyer a debt-to-income ratio that is too high. Another fifth (20.4%) of rejected applications are due to a potential borrower’s credit history. These can often be addressed, and borrowers and lenders can both be satisfied and live happily ever after.

But there is one thing that probably can’t be fixed: the value of the collateral backing the loan. In other words, how much is the house worth? According to a recent study by CoreLogic, nearly 14% of rejected mortgage applications are due to insufficient collateral.

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That typically means that a third-party appraisal (ordered by the lender) does not support the negotiated contract price between the seller and the buyer. According to CoreLogic, there are several reasons why an appraisal may come in at a lower value than the contract price:

In today’s sellers market where homes sell quickly and bidding wars have become commonplace in many of the nation’s largest housing markets during the last few years, there is a good chance that the winning bidder may have overpaid for the home. Similarly, when buyers fall in love with the design or unique custom features a home has to offer and are more than willing to pay extra for personal preference, appraisers may not attach as much value to these non-standard features as the buyers out of concern for their broader appeal and marketability upon future resale.

At other times, the appraisal may fall short because home prices in the local market area might be rising quickly but the data appraisers rely on have not fully kept up with the market. Although appraisers are supposed to make “date of sale” or market trend adjustments on past comparable sales, it is likely that the adjustments may be inadequate in keeping up with a fast-rising market. Given rapid price acceleration in many markets during 2014 to 2015, some appraisals may have insufficiently adjusted for market price movements.

As a percentage of all appraisals, 2.1% come in more than 10% below the contract price and 3.1% come in between 5.1% and 10% below the contract price.

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