5 Reasons You Can Be Denied a Mortgage -- Even if Your Credit Score Is Excellent

You might think that a higher credit score can improve your chances of getting approved for a mortgage, and of getting a lower interest rate. And you'd be right.

However, a strong credit score is only one of many factors lenders consider when deciding if you'll get approved or not. In fact, there are several other reasons why you can get denied for a mortgage, even if you have a top-tier credit score.

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The home is too expensive

Lenders want to be sure you're able to make your mortgage payments every month. The first way they do this is to make sure the monthly payments on your loan don't consume too much of your income.

Now, the exact threshold depends on the type of mortgage you choose, as well as the lender's own policies, but your new mortgage payment typically can't exceed a certain percentage of your pre-tax income. The traditional maximum is 28%, but many lenders will allow higher ratios.

You can eliminate any confusion by applying for a pre-approval before you start shopping for a home. By doing so, you can find out the maximum amount of money you'll get approved for.

Your other debts are high

It isn't just about your new mortgage payment. Lenders want to make sure your bills aren't consuming too much of your income, so they'll take a look at any other debts you might have -- specifically the required monthly payments on each one.

This is known as your debt-to-income ratio, or DTI. A ratio of 36% of your income or lower is ideal (including your new mortgage payment), but many lenders will allow DTI ratios as high as 45%. So, if you have pre-tax household income of $10,000 per month, no more than $4,500 can go towards debt repayment, at least for the purposes of mortgage approval.

Your employment history isn't solid

Not only will lenders take a look at your income, but they'll want to ensure that there is a high probability that your income will continue. For this reason, your employment history is a big piece of the puzzle.

In most cases, lenders want to see an employment history of at least two years in the same career field (more is better) without any significant gaps. If you leave one job and start another shortly after, that's fine. Plus, it's worth noting that there's an exception if you were in school. For example, if you graduated from college and started your first job a year ago, it won't necessarily prevent you from getting a mortgage.

You don't have much cash

Of course, a solid employment history doesn't guarantee that you'll always have a job in the future. So, it's important to show lenders that you have enough money in reserves to cover your mortgage in case something unexpected happens.

This can vary significantly by lender and the type of mortgage, but six months' worth of reserves is a common figure. The good news is that this doesn't need to be cash sitting in a savings account. Money in investments, or even in retirement accounts in some cases, can be considered.

The home isn't up to par

You should always schedule a home inspection for your own protection. But with some popular types of mortgages -- such as FHA loans -- the home needs to meet certain requirements. If the home you want to buy doesn't pass the relevant inspections, it could be grounds for mortgage denial.

These factors can work for or against you

As mentioned, you can be denied a mortgage for any of these reasons, and this isn't even an exhaustive list. However, it's also important to keep in mind that they can also work in your favor if they strengthen your application. For example, if you have virtually no debt other than a mortgage or have lots of cash in the bank for reserves, it can boost your chances of approval and make you look like a more solid borrower in the lender's eyes.

The key takeaway is that there's more to mortgage approval than just your credit score. It's important to be a solid all-around applicant.