It’s a shock when your application for a mortgage is declined. You are excited about owning a home, but the opportunity gets snatched away. What can you do about a mortgage application denial?
First things first
If your mortgage application is denied, ask the lender why. Under federal law, you have a right to know the specific reasons your application didn’t pass muster. This will allow you to know if the mortgage application denial was based on some miscommunication or, if not, what areas you need to work on to ensure you’ll be approved the next time you apply.
Denials based on credit history
Lenders check with major credit reporting agencies to determine your credit score. You should as well; you can see it by visiting www.annualcreditreport.com.
If you discover errors on your credit report that result in an inaccurately low score, challenge it. Document why the information is erroneous, then dispute the score with the three credit reporting agencies — Experian, Equifax, and TransUnion — as well as the creditor involved. File the dispute by certified mail with return receipt. If identity theft caused the issue, send the documentation that you have disputed the fraudulent account along with affidavits attesting that you did not open the account and police reports on the crime committed against you.
If there are no inaccuracies and your score is not great, it’s possible you can still qualify for a mortgage, but at a higher interest rate. But if your score is too low — typically something less than 620 — take steps to raise it to avoid another mortgage application denial.
Your credit score reflects your debt-paying history. If you have a history of late payments, or even foreclosure, repossession or bankruptcy, get your financial house in order. Be wary of credit repair companies that offer to restore your credit score for a fee. There are no quick fixes. Instead, rebuild trust by developing a track record of making debt payments on time. Set monthly reminders on your phone so you don’t forget.
Denials based on credit debt
Try to pay off debts entirely, such as your credit card balances. Use your cards regularly, but don’t charge more than you can pay in a month. If you have multiple debts, contact a bank about getting a debt consolidation loan. You can contact www.studentloans.gov about consolidating student loan debt. And begin building an emergency fund to help you through financial emergencies, which can lead to unmanageable debt levels.
Denials based on your existing debt load
Carrying too much debt can result in a mortgage application denial. Mortgage lenders look at two debt-to-income ratio numbers to evaluate your ability to pay off your loan. The “front end” ratio divides the amount of your expected monthly house payment by your monthly income. Your house payment should be no more than 28 percent of your monthly income. The “back end” ratio compares your monthly income to your anticipated mortgage payment plus the total of all your current monthly debts. Lenders want a ratio at 36 percent or less, although some loan programs will lend on a ratio as high as 50 percent.
If you get rejected because your front end ratio is too high, you must choose a less expensive house or put more money down to reduce your monthly payment. If your back end ratio is too high, work to aggressively pay down debt, especially credit card debt. This will take time and may require you to put off a home purchase until you’ve made some real progress.
Denials based on job history and income
Your employment history and income are important to lenders. The mortgage company will contact your employer to verify the information you have supplied and may even request a letter regarding your future income prospects. If you are self-employed, expect a thorough vetting of your business and future income-earning ability. You must supply the lender your bank and investment account balances. It will also require back tax returns. Be complete and detailed to ensure a fair assessment.
If the lender rejects your application because of your employment or income, hold off on buying a home until you establish a more stable work history with advancement and income growth. In the meantime, systematically build your savings and investments.
When it’s not about you
Features of the house you are trying to purchase can trigger a mortgage application denial.
If the home you want appraises for less than the purchase price you’ve agreed to, resulting in a loan-to-value ratio of greater than 80 percent, the lender will likely deny your loan request. To get the loan, the lender will require you either to carry mortgage insurance, increase your down payment, or renegotiate the purchase price downward.
If the home inspection reveals significant repair needs, the mortgage company can insist that it be repaired and that the work be professionally evaluated before it will lend. To resolve this issue, have your agent negotiate with the seller’s agent.