Being denied a mortgage isn't the end of the world.
Don’t abandon your Pinterest board of home design ideas just yet!
There are still things you can do to fix the issue; here are our suggestions for what to do next.
Why Didn’t You Qualify?
Start by determining exactly why your application was rejected. Unlike your high school crush, lenders are required to disclose their reason(s) for rejecting you. If they do not offer this information right away, don't hesitate to ask. Once you have a better idea of where things went wrong, it will be much easier to put together a plan of action.
Below, we’ll cover some common reasons for a declined mortgage application, and what to do about them.
You Have a Poor Credit Score
Your credit score is hugely important in the mortgage application process. The better your score, the better your chances of having your loan approved. If you have a low credit score (typically below 620 is considered low) then this is likely the reason for denial.
Be sure to check your credit report for errors, and start implementing practices to improve your credit score. Actions like paying off debt and/or adding new accounts you pay off in time positively impact your credit score and look good on a mortgage application overall. Having a stable co-signer could help even things out as well.
You Submitted Too Many Applications
When searching for the right mortgage lender, it makes sense to think you should check out all your options.
But did you know that rate shopping can actually hurt your credit score?
When you make loan inquiries on your own (for non-lending purposes), this is a “soft inquiry” that shouldn’t affect your score. However, if you make a “hard inquiry” (occurs when you actually apply for a mortgage) with multiple lenders, it can lower your credit score. These inquiries will also remain on your credit report for two years. Minimize your future applications and continue with habits that improve your credit score.
Your Debt-Ratio is Off
The bank will look at your financial standing in terms of the monthly debt payments you’ll be making, plus additional monthly costs such as utilities and taxes. This is used to calculate your Total Debt Service Ratio (TDS), and if that sum exceeds 40% of your income, a lender will probably deny your application.
Some lenders may be more flexible, but if more than half of your income currently goes toward repaying debt, you should focus on reducing this proportion before re-applying for a mortgage loan.
Lenders will also calculate your Gross Debt Servicing Ratio (GDS) which will compare your housing costs plus the expected monthly mortgage payments, and this should not exceed 32% of your income. Calculate your TDS and GDS on your own to gain a clearer idea of your budgeting options.
Your Down Payment Was Too Small (or a Gift)
A 20% down payment used to be the base requirement. Now, you can apply for a mortgage with as low as a 5% down payment – but that doesn’t mean it will be approved.
The higher the down payment, the better your chances of being approved for the loan. Something like temporary additional work for supplementary income is worth it to save up more cash first. Receiving this money as a gift is another option, but it may not be your best solution.
As incredibly generous as it was for grandma and grandpa to gift you money for your down payment, some banks or individual lenders may look upon this more negatively. Lenders may deduce that you won’t be as committed to an investment gleaned from someone else’s cash contribution.
You Lack Supporting Documents
Banks and mortgage lenders like to see a good, solid financial history in order to get a clear idea of your financial habits. If you aren’t able to demonstrate your ability to successfully repay your mortgage loan through a collection of documents, lenders may dismiss you as too much of a risk. Private lenders may have fewer requirements, however, so it’s worth shopping around a little.
You’re Self-Employed or a Contract Worker
This is related to the previous issue. A strong income and employment history may be harder to compile if you’re self-employed or receive irregular payments. Always keep thorough documentation of your income; turning over documents like tax records and bill repayments can prove your earnings and show lenders you are, in fact, financially responsible.
Admin or Appraisal Errors Were Made
Even something as crucial as a loan application is not immune to errors. Carefully read over documentation provided to you and, if you notice any potential errors, bring it to the attention of the lender immediately.
Getting your approval may very well be as simple as correcting a typo.
Another process that leaves room for error is your property appraisal. Since the amount a bank will lend you depends on your property value as collateral, the appraiser’s inspection results are critical. A lender may deny your application if your home’s appraised value is lower than the amount you want to borrow. Consider having multiple appraisals done and communicate with the appraisers to ensure the results are accurate.
Though it may take some time to get things in working order, a few financial changes can help you navigate the waters to your end goal. Don’t give up due to a denied mortgage application – keep your eye on the prize and that home can still be yours one day!