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- A mortgage denial doesn't mean it's impossible to get approved for a home loan.
- You may qualify for other home loan programs with the same lender.
- Consider using a mortgage broker to explore alternatives.
- Improving your credit score and paying down debt can help increase your approval odds.
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 many reasons why your mortgage funding 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 credit 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 money’s origin and hesitate to approve your mortgage.
What to do if your mortgage application is denied
If a lender rejects your mortgage loan application, take these steps to understand why it happened and prevent it from occurring again.
Contact your loan officer and find out why you were denied
When a lender rejects your loan application, “it shouldn’t be a surprise,” says Brian Koss, regional director of Movement Mortgage. “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.
Ask about other types of mortgages
You could still be eligible for a mortgage even if you were denied. But you’ll need to explore other loan programs that may be a better fit for you financially.
Inquire with the loan officer to learn more about alternative mortgages, such as FHA loans or USDA loans, that may be available to you. It’s also worth reaching out to a mortgage broker and having them shop around your information to lenders in their network who may be able to assist with your lending needs.
Examine your credit
Your credit score plays a big role in determining what types of mortgage 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 they turned you 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 loan type, 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 home loan advisor for Gold Star Mortgage Financial Group in California. “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.
Reduce your debt-to-income ratio
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, and lenders consider this ratio when determining whether you’re eligible for a new loan.
For example, if you already spend most of your wages 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, you can take steps to improve that number.
“One of the big things you can do is pay off some other debts,” says Mele. “A credit card is a great place to start.”
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, too.
“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 applying with 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. However, 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 subpar credit, but your parents have stronger credit and are willing to co-sign your loan, a lender may approve you more easily.
Keep in mind, though, getting a co-signer may complicate your application 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 a lender denies your mortgage loan. If that happens, take the time to understand why your mortgage was rejected, address the issue and explore other loan options.