Your home loan application was denied. These words sound unforgiving, however they don’t generally mean you can’t get a home loan.
About 1 in 2 applications for a home loan gets rejected by lenders according to the Mortgage Bankers Association or about 30 percent of mortgage applications for new purchases.
Regardless of the tight lending condition, borrowers shouldn’t generally take “no” for an answer. At times, they simply need to apply with a different lender or find a way to improve their credit.
Once denied, find out exactly why the lender turned you down. By law, you have the privilege to receive a disclosure (denial) letter with the reason you were rejected. Yet, those letters can be extremely broad.
In the event you don’t understand the reasons listed on the denial letter, you can ask the loan officer to explain it to you.
Most Common Issues of Mortgage Rejection
Credit – A number, roughly between 300 and 850, that summarizes a consumer’s creditworthiness. The higher the score, the more able and willing a consumer is to repay a loan, lenders believe. The best mortgage rates and terms go to borrowers with credit scores of 740 and higher. Generally, a “low” credit score is in the “fair” to “poor” ranges below.
- 740 and higher = great
- 661 to 739 = great
- 601 to 660 = reasonable
- 501 to 600 = poor
- 500 or lower = terrible
The most effective method is to show proof that you’ve paid your lease on schedule for the past 12 months and that you won’t have a payment shock on your housing payment. Another approach to balance the effect of poor credit is to make a bigger down payment, particularly a payment of 20 percent or more. If you can only go from 3.5 percent to 5 percent for your down payment, you’re better off keeping the extra cash in reserve.
Appraisal – Appraisal issues have turned into a more typical issue over the last decade with loan approvals. Often, the home does not appraise for what the borrower and lender expected and in some cases comes back lower than what’s owed on the house. This implies the borrower right now has negative equity.
Debt-to-Income Ratio – The measure of cash you owe versus the amount you bring home is called your debt-to-income ratio, or DTI. Your DTI is the rate of your month to month net wage that goes toward paying obligations. As a rule, you don’t want a DTI higher than around 40%. If your DTI is too high, lenders may worry you can’t afford to make the monthly mortgage payments.
How To Improve Your Odds of Approval
Ask About a Different Type of Loan – There are different types of mortgages, and each mortgage product comes with its own set of lending guidelines. A conventional mortgage loan is a popular option for cash-strapped buyers since it only requires a 3 percent down payment. There is, however, a minimum credit score requirement of 620. If your credit score is under 620 and you apply for a conventional loan, the bank will likely turn down your application.
Find Another Lender – Just because you’re rejected by one lender doesn’t mean every lender will reject your application. There is some flexibility in mortgage lending. The bank will look at existing debts and calculate your debt-to-income ratio when considering whether you’re eligible for a mortgage loan.
Tidy Up Your Credit Report – It only takes one credit report mistake to drive down your credit score and prevent a mortgage approval. It’s important that you dispute errors on your credit report, either by working directly with your creditors to remove inaccurate information, or by filing a dispute through the credit bureaus. It doesn’t matter that a negative item was reported in error, lenders will not approve your application until you resolve the matter.