Good news first. Mortgage origination levels have recovered from their housing crisis lows a decade ago.
Unfortunately, not everyone will be approved for a mortgage loan. Almost as bad (possibly worse), is when you've been pre-approved but have your mortgage loan declined at the last minute.
Different lenders have different rules. Just because a home loan gets denied by one mortgage company doesn't mean it'll be denied by another.
So your mortgage application was declined, what next?
Understand your mortgage loan situation
People can be denied for a mortgage loan for a variety of reasons. Knowing your situation, especially why it is you were denied, or will be denied, as well as how to get ahead of any potential hurdles can make all the difference.
Credit challenges. Do you know your credit scores? You should. Especially since one of the most common reasons a mortgage is denied is due to a buyer's credit score.
You're entitled to a free credit report from each of the three bureaus each year. Buyers should take advantage of this offer by getting copies of their credit report, and then know how to get ahead of any potential challenges they may have.
Your payment history accounts for 35% of your credit score. This includes your account payment information, along with any delinquencies and public records. How has your payment history been?
Your payment history is closely followed by how much you owe on your credit accounts. How much you owe makes up 30% of your score. The amount of available credit you're using on revolving accounts is heavily weighted. How close are your revolving accounts to being at their maximum limit?
It's not just important to know your credit scores. You should also know why your scores are low. Since one out of four U.S. consumers have errors that affect their credit scores, you could have simple errors that could've been corrected beforehand.
Here are steps you can take to correct an error on your credit report:
- Get a copy of your credit report
- Review your credit and identify errors
- Send a letter to credit bureaus
- Send a letter to the creditor
- Follow up after 30 days
If your credit score is low due to errors -- fix them. If they're low due to not making timely payments, you may need to wait until you have some time on your side with solid timely payments. If your credit cards are maxed out, you may want to pay down the balances some before applying for a home loan.
Not enough income. Lenders want to see that you're able to make the minimum monthly payments before they approve your home loan. With mortgage loans, lenders are required by law to calculate your ability to repay.
If you don't have enough income, your debt-to-income (DTI) ratios may not qualify. Lenders compare how much you earn each month to how much you spend on debt repayment, assuming minimum payments. If it doesn't look like you'll be able to afford the new debt, your application could be rejected.
Another common reason a mortgage is denied after pre-approval is because a buyer takes on additional debt. It is very important to remember that when purchasing a home, you shouldn't incur any new debts or liabilities.
Prior to taking on any additional debt, including opening a new line of credit, be sure to speak with your lender. New liabilities can change your debt ratios and cause your loan to be declined
Fortunately, you may be able compensate for the shortage of income by adding a co-signor to your mortgage application.
Large cash deposits. Many homebuyers don't realize the importance of this one.
When you are pre-approved for a mortgage, your lender should ask for your down payment documentation. Should they see any large deposits, you may need to explain the "source" for them.
Underwriters don't like seeing cash deposits that can't be sourced because there's no way to know where the money came from. A good rule of thumb is this -- if you can't prove from where it came, don't throw it into your bank account. When in doubt, seek advice from your mortgage lender.
Change in employment. As a general rule, lenders like to see stability. One way they check for stability is by looking at your employment history. Working for the same employer for the past two years or more can be helpful for your loan approval.
If you recently changed how you get paid, this could cause a significant problem. For example, if you've been getting paid by W2 and are considering a move where you will be paid by 1099, you should speak with your lender prior to doing so.
If you recently started a new job, you should notify your lender to see what's required, and make sure this doesn't impact your approval. Your lender may require an offer letter or even paystubs in order to get your loan to the closing table.
Apply to another home loan provider
So what to do after mortgage denial?
It's important to remember that not all lenders have the same set of standards and underwriting guidelines. Some may be less stringent than others.
Some lenders may have their own set of "investor overlays". Overlays are additional internal underwriting criteria put in place by each lender
Even though a lender may have turned you down due to their overlays, you may find another lender that has no overlays at all, or at least ones that are less strict.
Before reapplying with a new lender, find out why your loan application was declined. You can take this information onto your next lender to discuss ways you may be able to get approved.
When you do reapply with another lender, be transparent. Don't be shy about explaining everything pertaining to your recent loan denial. This may include discussing certain personal details about why the last lender said no.
It may be how the other lender calculated your income, what the minimum credit requirements were, how much in assets were needed, the fact that you changed jobs, that large cash gift that showed up in your bank account, etc.
By disclosing as much information as possible, about how and why your mortgage loan was denied, your new lender can know what they can or can't do differently. It's better to know now if by chance they can't help you, as opposed to just before closing.
You should ask the new mortgage lender if they have the same underwriting criteria. If they do, that could be a sign to look elsewhere
Even if you've been turned down for a mortgage, don't give up. Just because you got turned down once does not mean you'll hear the same from the next lender. There's a big chance that another lender can find the right program for you, with better mortgage rates.
