It can be devastating to be turned down for a mortgage after getting your heart set on buying a new home. While lenders have loosened their lending criteria somewhat since the financial debacle nearly a decade ago, it can still be challenging to get approved for a mortgage if your credit score is low, your debt-to-income ratio is high, or your income is unstable. Ideally, lenders want borrowers to be able to check off all requirements before extending a mortgage.
So, what happens after you’ve been turned down for a home loan? Is your dream of buying a home dead?
Not necessarily. The next steps you take from this point forth will depend on a few components, including why you were denied in the first place. Having said that, there are certain things you can do right now going forward to help boost the odds of having your application approved at some point in the near future.
Find Out Why Your Mortgage Application Was Rejected
First things first. Identify the exact reasons why your lender denied your mortgage application. Luckily, lenders are legally obligated to inform you in writing why you were denied, which should make it easy for you to identify these reasons. But while this letter should outline particulars about your mortgage denial, sometimes the language used can be confusing to the average consumer. As such, it’s helpful to get in contact with the lender to have the points made in the documentation explained and have any of your questions answered.
Some of the more common reasons why mortgage are denied include:
- Low credit score
- No credit
- Inadequate income
- Lack of sufficient funds for a downpayment
- High debt-to-income ratio
- High loan-to-value (LTV) ratio
- Low appraisal
Whatever the reason, there are steps you can take to improve your situation and put yourself in a better position to be approved the next time around.
Consider Other Loan Options
If you were turned down for a conventional mortgage, perhaps you stand a better chance of getting approved for a different type of loan program. Conventional mortgages typically have stricter criteria compared to other types of loans.
For instance, government-backed mortgages like FHA loans tend to be a little easier to get approved for, as their down payment requirements are lower (3.5% of the purchase price compared to a minimum of 5% for conventional mortgages), as are their credit score requirements (580 compared to 720 for conventional loans). In addition, traditional mortgages are typically less flexible when it comes to debt-to-income ratios compared to FHA loans.
Keep in mind that sometimes lenders might not have the mortgage option that you want or need, but this doesn’t necessarily mean that you can’t find it somewhere else. If the lender you’re currently working with does not offer these alternative options, consider shopping around for one that does.
Have Another Appraisal Done
If the reason your mortgage was denied was because the appraisal for the home you agreed to buy came in much lower than the purchase price, consider having another appraisal done. Lenders aren’t partial to extending loans on properties that they perceive not to be worthy of their investment. It’s too risky for them if the borrower winds up defaulting. As such, they typically reject these mortgages unless the borrower is able to come up with the cash to make up for the difference.
However, it’s possible that an error was made in the initial appraisal, causing the value to come in too low. Perhaps the appraiser used old or dissimilar comparables or did not take into account any improvements that were recently made to the home. Nothing is perfect, so there is a slight chance that the appraisal was simply inaccurate. If you have a hunch that this is the case, consider seeking a second opinion.
Start Working on Your Credit Score
If a low credit score played a big part in your mortgage denial, then the time to start improving it is now. While boosting your score doesn’t happen overnight, the steps you take today can make a huge difference in your score in just a matter of a few months. By that time, your score may be healthy enough for your lender to approve your mortgage application.
For starters, pull your credit report so you can see exactly what your score is and if there are any errors on the report that may be pulling it down. If you spot any, report them to your credit bureau to have investigated and rectified.
To prevent your score from falling any further, be sure to pay all of your bills in full by their due date. Perhaps one of the biggest reasons why your score is low is because you’ve defaulted on payments in the past. To increase your score, make sure to be timely with all debt payments going forward.
If you have a credit card, don’t max it out. The credit limit you’ve been granted shouldn’t be seen as an invitation to rack up your bill. Instead, it’s recommended that you spend no more than 30% of your credit limit in order to improve your credit rating. If you have an old credit card that you rarely use, don’t cancel it. Old credit is typically seen as good credit, as long as you don’t abuse it.
As you work towards ensuring mortgage approval in the near future, do what you can to better your credit rating.
Pay Down Your Debt
The amount of debt you have on the books has a huge impact on how your lender views your ability to pay your mortgage on time every month. A large amount of debt relative to your income will increase the odds that you won’t be able to make due on your mortgage payments, at least in the eyes of the lender.
If you currently have a high debt-to-income ratio, do your best to start chipping away at that pile of debt. Practice some self-discipline and avoid making any large purchases, especially on credit. The less debt you have on your record, the better your chances of getting approved for a mortgage in the near future.
Start Saving For a Beefed-Up Down Payment
While you’re paying down your debt, set a little bit of money aside each month to be put towards your down payment, especially if this was a major reason why your application was denied. The higher your down payment, the lower the mortgage amount you will need to qualify for.
Consider a Co-Signer
If you’re still finding it challenging to qualify for a mortgage despite your best efforts to improve any of the above, consider asking a close relative to co-sign the mortgage with you. This is often a last resort and is not typically recommended, but it’s still an option nonetheless. Of course, the co-signer will need to do their due diligence to ensure they fully understand the implications of co-signing on a home loan, as they will ultimately be on the hook if you ever default on the mortgage at some point.
The Bottom Line
It’s never fun to see the words “DENIED” stamped in bold red letters across your mortgage application, but that doesn’t mean your home buying journey is over. You can always try again in the near future, but before then, there are steps you should take to significantly improve the odds of approval the next time around.