You supplied all the paperwork. You filled out your Uniform Residential Loan Application, and you supplied a signed letter from your supervisor verifying your employment. Yet your mortgage lender rejected your application for a mortgage.
Your lender might have pointed to a low credit score or a low income. Maybe your job history isn’t long enough.
You’re now destined to life of renting, right? Not necessarily.
Just because a lender denied your mortgage application doesn’t mean that owning a home isn’t in your future. You can take steps to make yourself a more attractive borrower. And when you apply again? You might nab that coveted acceptance.
"Like snowflakes, no two borrower profiles or loan applications are the same," said Amy Tierce, regional vice president with Needham, Massachusetts-based Wintrust Mortgage. "There are many factors that influence credit scores. With the right approach, a consumer can make a major impact in improving those scores."
The denial letter
The first step to becoming a more attractive borrower is to determine exactly why your lender rejected your application.
You will get some clues in the form of a denial letter. When a lender rejects your mortgage application, it must send you one of these letters. The letter will list why you were denied.
These letters can be general in nature, but one might say that your credit score was too low, your monthly income not high enough or your employment history too short. A letter might state that the home you are trying to finance is not worth as much as you are trying to borrow.
If your denial letter doesn’t provide enough specifics, call your lender to ask for a better explanation. You’ll need to know why you were denied if you want to take the steps necessary to improve your chances for an acceptance next time.
Lenders often deny borrowers because of bad credit. This makes sense: A low FICO credit score shows that you have struggled to pay your bills on time in the past. Lenders don’t want to take the risk that you will start missing your monthly mortgage payments.
Most lenders reserve their lowest interest rates for borrowers who have FICO credit scores of 740 or higher. If your score is so low – say under 620 or so – you’ll struggle to find lenders willing to work with you.
Joe Parsons, senior loan officer with PFS Funding in Dublin, California, said that even borrowers with especially weak scores can improve their chances of qualifying for a mortgage by taking some common-sense financial steps.
Parsons recommends that borrowers do all that they can to pay their credit-card balances down to 30 percent of their maximum limits. Eliminating credit-card debt immediately makes you a more attractive borrower, he said.
"It will raise your credit score, sometimes dramatically," Parsons said.
Borrowers with bad credit also need to create a new financial history of paying all their monthly bills on time, without fail. Every time you miss a credit-card payment or auto-loan payment by 30 days or more, your credit score will take a hit, sometimes falling by as much as 100 points. If you instead pay all your bills on time, your score will slowly but steadily rise.
This will take patience. If your score is especially low, it will take months -- or maybe even more than a year -- to grow it high enough to entice a lender to work with you.
Direct contact may help
If you don't want to wait that long? You might try the personal approach. Parsons says that borrowers with less-than-stellar credit should write a detailed and honest explanation letter to lenders explaining what led to their bad credit. And, these borrowers should explain in this letter why it might not happen again.
Parsons worked with one couple who were helping their parents financially. They also suffered some health issues and worked with prior employers who did not always pay them on time. The letter worked, and the couple found a lender willing to loan them mortgage money despite a lower credit score.
"Loans to borrowers with low FICO scores are typically manually underwritten," Parsons said. "The underwriter has to make a judgment call."
Robert Greene, regional vice president with the Solomon Group in Austin, Texas, said that while most borrowers understand the importance of credit scores, many don't realize that their debt-to-income ratios are just as important.
Most lenders want your monthly expenses, including your estimated new mortgage payment, to equal no more than 43 percent of your gross monthly income. If your debt-to-income ratio is out of whack, a denial letter might be coming.
"Debt-to-income ratio is definitely an important number," Greene said. "Lenders will take a close look at your outflow versus your income. Can you even afford to buy the house?"
To resolve this problem, you’ll need to either boost your income or lower your monthly expenses. The second is often easier. You can lower your monthly debts by paying down credit-card debt or paying off revolving debt such as student loans or auto loans.
Parsons recommends to his clients that sell any expensive toy with a loan attached to it, everything from motorcycles and RVs to boats. Eliminating the monthly debts that come with these items could boost your debt-to-income ratio to acceptance level.
Short job history
Lenders might reject you if you have a short employment history. They generally prefer working with borrowers who have held the same job, or have at least worked in the same field, for two years or more. If you just started working or if you have a history of jumping from job to job, with employment gaps between, lenders might be hesitant to work with you.
Time is often the only recourse here. You simply have to log enough time on your current job, or in your current field, to ease the concerns of lenders.
"There are situations where a loan denial is all in the timing," Tierce said. "Perhaps the borrower is just a few months away from having a full two-year work history. A loan application is like a puzzle. Each piece is reviewed on its own merit. They all have to collectively fit together to make a whole picture."