You Could Be Denied a Mortgage Even With Perfect Finances. Here’s Why

If you have great credit and a solid income, you may assume you’ll definitely be able to get the mortgage you need to buy a home. After all, most mortgage lenders look carefully at your financial credentials to make sure you don’t present a major borrowing risk.

But even if you’ve been pre-approved and meet the lender’s criteria when it comes to your finances, you might still be unable to get approved for a loan. Here’s how that could happen.

Lenders don’t just consider your personal finances

There’s a very simple reason why your perfect financial credentials may not necessarily guarantee you a mortgage loan. It’s because lenders don’t just look at you when they’re deciding if a loan is too risky to approve. They also look at the house.

See, mortgages are secured loans. Unlike, say, credit cards where you borrow and the lender just has your word that you’ll repay, mortgage lenders have an ownership interest in your house. The house acts as collateral or security for the loan, and if you don’t pay back the mortgage, the lender can foreclose and take your house.

As a result, if the home does not meet the lender’s criteria, then no matter how qualified of a borrower you are, the mortgage loan provider is simply not going to move forward with giving you the money to buy it.

When would a problem with a home get you turned down for a loan?

There are a few situations when a problem with a house could result in a mortgage lender saying you can’t borrow.

The house might appraise for too little

Most mortgage lenders won’t loan more than around 90% of the fair market value of a home (although there are some exceptions). If your lender follows this rule and your house appraises for less than you’re paying, you could be turned down to borrow unless you come up with extra money.

Say, for example, you’re looking to borrow $290,000 to pay for a $300,000 house — but the house appraises for $270,000. The lender might only be willing to lend you 90% of $270,000, or $243,000. If you couldn’t get the seller to drop their price or couldn’t come up with the other $27,000 you’d need, the lender would turn down your loan.

The house might be uninsurable

Lenders require insurance to protect their investment. If you’re looking to buy a house in a very high-risk area and can’t find a homeowners insurance company to cover it, the lender probably won’t give you a loan to buy it.

The house could have serious problems that make it unmortgageable

Lenders won’t lend you money to buy a property that is uninhabitable in its current condition or that has serious health and safety issues. As a result, a bad roof, an active pest infestation, structural issues, problems with plumbing or electric, mold and water damage, HVAC issues, and other major defects could make it impossible to borrow to buy that home.

If you happen to fall in love with a home that has these issues, you may be out of luck entirely with finding a mortgage lender — at least not without bringing a lot of extra money to the table in case of a low appraisal. You’ll need to think seriously about whether you should move forward anyway — and whether it’s feasible to do so if you’d have to be a cash buyer.

For most people, when problems with a house prevent a loan from going through, it’s best to just walk away and find a new place. Just be sure to include a financing contingency in your offer when you’re trying to buy, as that gives you the right to walk away without losing your deposit if it turns out you can’t get a loan for the home in the end.