Rejected for a Mortgage? Try Again – After Taking These Steps
According to the numbers made available through the Home Mortgage Disclosure Act, mortgage lenders rejected about 10.4 percent of all conventional mortgage loan applications in 2015. That denial rate is actually falling. Lenders rejected 14.2 percent of all applications for conventional mortgages in 2010.
Those numbers, though, don't provide much solace if lenders reject your application for a mortgage. It's easy to fret that your dreams of buying a home are over.
But they're not. Just because your loan application was rejected today, doesn't mean that you won't ever qualify for a wide variety of mortgage types. You can boost your odds of a future acceptance by taking the financial steps necessary to improve your credit score and lower your debt-to-income ratio.
The same holds true if you want to refinance your existing mortgage. Even if you were initially rejected, you can make changes to your credit and finances that will significantly increase your chances on a second attempt.
"The pendulum swings back and forth when it comes to how difficult it is to qualify for a mortgage," said Jason Hartman, president of Orange County, California-based Platinum Properties Investor Network. "It's more difficult to qualify for a mortgage today than it was in 2005, when lenders were giving money to anyone, often with no money down. But it's easier today than it was in, say, 2009. So you shouldn't give up after receiving a rejection. The pendulum swings. And if you take steps to improve your financial health, you might not even need that pendulum to swing in the other direction."
Why was your loan rejected?
The key is to first determine why your loan was rejected. Your lender will send you a denial letter that will list the reason or reasons for your denial. These letters, though, can be vague. If you don’t understand the reasons given to you by your lender, call and ask for a more detailed explanation.
Once you have this information, you can then take the steps necessary to improve your finances and make yourself a more attractive borrower, said Judy Zucker, vice president with Brooklyn-based FM Home Loans.
"More often than not, there is a way to fix it," Zucker said. "You may need to work on your credit, put down more money or possibly ask a family member to co-sign for you."
Ready to try again for a mortgage? Here are the steps you can take to improve your odds of qualifying.
Kevin Hardin, a senior loan officer with Seattle-based HomeStreet Bank, said that while borrowers can be denied a mortgage for several reasons, one of the most common is unrealistic expectations. Some consumers try to borrow more money than they can afford to pay back, Hardin said.
"In most cases, the borrower is trying to buy more home than their documentable income will qualify them for," Hardin said. "This is not something you can just change. The solution is to lower your sights to a home that is more affordable."
When determining whether to approve borrowers for a mortgage, lenders will rely on debt-to-income ratios. Lenders want your total monthly debts, including your estimated new monthly mortgage payment, to equal no more than 43 percent of your gross monthly income. If you are applying for a home that costs too much -- and requires too large of a mortgage payment each month -- you'll increase your odds of rejection.
As Hardin says, the solution is to target a home that costs less, one that won't require a mortgage payment that will boost your debt-to-income ratio over that 43 percent mark.
Work on your credit
Your lender might have rejected your application because your FICO credit score is too weak. Fortunately, you can boost that score. Unfortunately, doing this takes time.
"It's not a quick process, at all," Hartman said. "My advice is to start making changes in your spending habits right away. If you plan to buy a home, make sure that you are not doing anything to hurt your credit score."
Lenders today consider a FICO credit score of 740 or higher to be an excellent one. If your score is too low, though, lenders will hesitate to approve your loan request. Generally, scores under 640 make lenders nervous.
Your score rises or falls based on a number of factors. Certain missed or late payments will cause your score to drop if you are at least 30 days late on them. Your score will fall, too, if you build up too much credit card debt. Foreclosures and bankruptcies will cause your score to plummet.
To steadily improve your score, pay all your bills on time and pay off as much of your credit card debt as you can. Just don't close credit-card accounts if you pay them off; this can actually hurt your credit score.
Don't expect to boost your credit score quickly. Depending on how low your score is, it can take months -- or years -- to improve your score by enough to ease the concerns of mortgage lenders.
Check your reports
You can order one of each of your three credit reports -- maintained by the credit bureaus of TransUnion, Equifax and Experian – at no cost once a year from AnnualCreditReport.com. Once you receive them, look through them for errors.
These reports will list your open credit accounts, including any car loans, student loans and credit card accounts you are paying off. They will also list late payments or negative judgments such as bankruptcies -- which stay on your report for 10 years for Chapter 7 and seven years for Chapter 13 -- or foreclosures, which stay on your report for seven years.
If you do spot an error -- your report might list a missed payment that you know you made on-time -- correct it by e-mail or phone. Erasing an error can provide a quick boost to your credit score.
"The unexamined credit report can really hurt you," Hartman said. "It is so important to know what you have on your credit report."
Reduce your debt
Paying down your debt is another way to boost your chances of qualifying for a mortgage loan on your second attempt. Again, lenders want your total monthly debts to equal no more than 43 percent of your gross monthly income. If you can reduce your monthly debt load, you might be able to improve your debt-to-income ratio enough to qualify for a loan.
Say you are sending $300 a month to your auto lender. If you can pay off that car loan before you apply for a mortgage, that $300 will come off your monthly debt load. If you can pay off some of your credit cards, those required minimum monthly payments will disappear, too.
The more monthly payments you eliminate or reduce, the better your chances of snagging that mortgage loan.