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Your mortgage application was denied. These words sound harsh, but they don’t always mean you can’t get a mortgage.
If your lender rejects your request for a loan, all may not be lost. There are a few steps you should take after a mortgage denial to see how you can improve your chances and get a mortgage with your next application.
Common reasons why your mortgage was denied
From credit issues to changes in your financial situation, there are numerous reasons why your mortgage loan was denied at closing. Some of the most common mortgage denial reasons include:
- Credit issues. Lenders use your credit score to assess how responsible you are with credit and determine how risky it might be to loan you money. If you don’t have a high enough score (typically, 620 is the minimum for conventional loans) or you have derogatory marks on your credit report, lenders could deny your mortgage. Similarly, if you don’t have much credit history, lenders might decide that they don’t know enough about your ability to manage credit and reject your application.
- Change in employment status. Lenders prefer that borrowers have stable employment and income, so they might view it as a red flag if you’ve recently gotten a new job or have a history of jumping between jobs over a short period.
- High debt-to-income ratio. Your debt-to-income ratio (DTI) lets lenders know how much monthly debt you have to pay (including rent or mortgage costs, student loans, credit card debt, and auto loans) compared to how much money you’re bringing in. If you have too much debt, lenders might worry that you won’t be able to pay back a mortgage and deny your application.
- Large, sudden cash deposits. Usually, having plenty of cash is a plus when applying for a mortgage – unless you’ve received the money suddenly and can’t explain where you got it. In that case, lenders might be concerned about the origins of the money and hesitate to approve your mortgage.
What to do if your mortgage application is denied
It’s never pleasant to find out that your mortgage application has been denied, but there are steps that you can take to understand why it happened and how to prevent it from happening again. Here’s what to do if a lender rejects your loan application.
Find out why you were denied
When your loan application gets rejected, “it shouldn’t be a surprise,” says Brian Koss, executive vice president at the Mortgage Network, Inc. “Your loan officer should have given you a good assessment.”
The mortgage application process is fairly rigorous, no matter who you’re applying with. At some point in the process, if you have one or several strikes against you, the loan officer should give you some indication that you may not qualify.
“The lender is supposed to provide you with the reasons you were denied so you can take that info to heart and use it to identify a way to resolve things, so you can get on a better financial footing and you can re-qualify later,” says Bruce McClary, senior vice president of communications for the nonprofit National Foundation for Credit Counseling.
Examine your credit
Your credit score plays a big role in determining what types of loans and rates you’re eligible for. Be sure to examine your credit report closely for any errors that might be dragging down your rating.
“Get to know your credit score and take action to ensure your credit score is strong,” says Dave Mele, president of Homes.com.
If your credit score isn’t great and a lender tells you that’s why you were turned down, don’t assume that’s the end of the road for you and a loan. You still might qualify for a loan with a different lender. For example, government-backed loans like those from the Federal Housing Administration (FHA), VA or USDA tend to have lower credit limits than private mortgages do.
Banks don’t always offer every type of loan, so if you’ve been turned down by the same bank where you’ve been keeping your cash, in many cases, it’s not you; it’s them.
“Seek out someone that works for a non-depository institution and works with a direct mortgage lender versus a bank,” says Corvi Urling, a loan consultant at LoanDepot. “Mortgage lenders generally carry a larger portfolio and would then have the ability to offer access to different programs that you might qualify for.”
You can also work on improving your credit. The best way to do that is to make sure you’re paying your bills on time, but it’s also a good idea to minimize how much credit you’re using by keeping little or no balance on your cards. You might also be able to take advantage of credit-boosting programs.
Pay down your debt
Even with a strong credit score, lenders also look to see how much money you owe for things like credit card bills, car payments and student loans and compare this to how much money you make. As mentioned above, this is known as your debt-to-income ratio, or DTI, and it can play a huge role in lenders determining whether you’re eligible for a new loan.
For example, if your wages are already mostly spent on existing high monthly bills, lenders won’t have the confidence that you’ll be able to make your monthly mortgage payments as well.
Most of the time, lenders want to see a DTI of less than 43 percent. If you don’t fit that profile, there are ways to overcome that number.
“One of the big things you can do is pay off some other debts,” Mele says. “A credit card is a great place to start.”
Learn more about balance transfer credit cards that help you pay off debts faster.
Look for help with student debt
Today’s generation of homebuyers is also far more likely to be saddled with debt from their education, but that doesn’t mean they can’t buy a home.
If your student debt is holding you back, consider an income-based repayment plan, which can reduce your monthly payments obligation. Some lenders may also have specific mortgage products just for doctors, who may have sky-high student loans but typically also have above-average salaries once employed. And don’t forget to apply for President Biden’s student loan forgiveness program.
You wouldn’t stop buying clothes just because the first thing you tried on didn’t fit, so don’t make that mistake with your mortgage.
“There’s a lot of folks that aren’t bad borrowers but just have credit issues,” says Raymond Eshaghian, president of GreenBox Loans.
There are mortgage loans out there for many different buyer profiles, and just because a standard 30-year loan might have been right for the couple down the street, that doesn’t mean it is for you.
“You never want to have all your eggs in one basket. It would be horrible if you get all the way to closing and you have the moving truck out front and now you can’t move into that house,” says Urling, who recommends filling out applications with at least two or three lenders to help defray the likelihood of being rejected outright. “There’s no obligation for a consumer to take a loan at any point.”
There is no mandatory waiting period after you’ve been denied, but because a mortgage application usually involves a credit check, which can lower your score, it might be a good idea to wait a bit so that it has time to smooth out.
A co-signer might also help you qualify. For example, if you’re a young buyer with sub-par credit, but your parents have stronger credit and are willing to co-sign your loan, you may be approved more easily.
Keep in mind, though, getting a co-signer may make your application a little more complicated because you’ll need to include more supporting documents.
The mortgage loan origination process often comes with many highs and lows, so try not to get too discouraged if your mortgage loan gets denied. If that happens, take the time to understand why your mortgage was rejected, address the issue and explore other loan options.