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Denied Mortgage Financing

Your Goals

Applying for a mortgage is a time-consuming process, which makes it even more discouraging when you end up being denied. However, just because you’ve been denied for financing once doesn’t mean you have to give up on your dream of becoming a homeowner.

Here’s how you can bounce back and improve your chances of being approved on your next mortgage application.

Figure Out the Problem

You need to understand why you received a denial on your mortgage application so you can know what to fix. The good news is that you will receive a denial letter explaining exactly which factors contributed to it.

There are a few common causes of denials on mortgage applications. If your credit score or income is too low, mortgage lenders may be unwilling to approve your loan application because you present a high risk. Even if those are both fine, your employment history could also cause issues. A track record of jumping from job to job can be a red flag for lenders. They want to see stable income and multiple years spent in one position.

Your down payment also plays a role in whether your mortgage application is approved. The general range for down payments is 5 to 25 percent of the home’s purchase price, although you can get mortgages backed by the federal government with lower down payment amounts. Still, the more you have saved to invest in your home, the better. If you can’t save up enough for a solid down payment, lenders will wonder if you’re financially responsible enough to pay off a mortgage over a period of decades.

Work on Your Financial Situation

As you can see from the issues listed above, most mortgage denials relate to your financial situation. The exception is if you’ve been denied because of a problematic employment history, which can only be solved by sticking with one job and demonstrating to lenders that you have a stable income.

So, you need to look at your financial habits to see what you can change to make yourself a better candidate for a mortgage. If your credit score isn’t high enough, you can steadily improve it by always making your payments on time and keeping your credit utilization as low as possible – aim to have it under 30 percent at all times. You should also pull copies of your credit reports with the three major credit reporting agencies (Equifax, Experian, and TransUnion). See if there are any mistakes that you need to correct, which is an easy way to boost your credit immediately.

If the problem is with your income, you’ll need to either find a way to make more money, such as picking up a side job or negotiating a raise, or start looking for homes that don’t cost as much. For denials due to an insufficient down payment, you can spend time saving more money or, again, adjust your home search to find something that’s more affordable.

Consider Other Financing Options

Keep in mind that mortgage requirements vary quite a bit from lender to lender. Look around for lenders who may be a better fit for your situation. For example, if you have some issues on your credit history, try a mortgage lender known for working with people who have lower credit scores.

If the issue is with your down payment, you could look for loans backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). These mortgages are still issued by a private lender, but they’re guaranteed by the FHA or the VA, which means the lender doesn’t need to take on as much risk. This enables you to get a mortgage with better terms than you could have obtained on your own, although you do usually need to pay for private mortgage insurance with these options.

When you’re looking around for other mortgage options, make sure you carefully research the type of mortgage and the lender before you apply. There may be plenty of lenders out there, but every time you apply, it results in a hard inquiry on your credit report. This brings your credit score down, which means you want to avoid doing it too often. Many lenders allow you to see if you’re preapproved for a mortgage through them by using a soft credit inquiry, which doesn’t affect your score.

Improving your financial situation is always a good idea, because not only does it make approval on a mortgage more likely, but it will also result in better terms on your mortgage. So, don’t give up just because you’ve been denied on a mortgage once. Continue looking for a mortgage that fits your needs and your financial situation. You may find there's another option that works perfectly to get you into your new home.

 

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