What Do I Do If I’m Rejected For A Mortgage Loan?
If you have gone through the process of applying for a home mortgage only to be rejected by a lender, you may be wondering what’s next.
The truth of the matter is that there are plenty of reasons why an applicant may be rejected for a mortgage (according to the Federal Bureau of Consumer Financial Protection). Considering that nearly one out of nine applicants are rejected, this is a more common experience than you may realize.
In this article, we’ll take a look at what individuals can do to increase their odds of getting approved in the future.
What are the Most Common Reasons Why a Mortgage Application May Be Denied?
There are plenty of reasons for an application for a mortgage to be denied. In fact, lenders may reject a loan for problems as simple as an error to fill out a loan application properly, or may be more complex as a lender’s decision to mitigate their risk in an evolving economic future.
The following reasons are the most common reasons why a mortgage application may be denied:
- You recently applied for a new loan or line of credit
- You recently switched jobs
- You recently accepted money from unverified sources
- You didn’t include crucial information on your application
Some of the most common reasons why you may not receive approval for a loan include:
You recently applied for a new loan or line of credit
If you’ve applied for credit or seek out a new loan before applying for a mortgage, chances are that loan underwriters take notice. The reason for this is that lenders look at your “debt-to-income ratio”. This ratio is calculated by totaling all of your monthly debt payments and dividing by your monthly gross income. If you make $3,000 per month but carry $1,500 of debt per month, your debt-to-income ratio is 50%. Mortgage lenders usually want to see a ratio of 43% or less.
With this understanding, any additional debts or those that you may incur in the future (i.e. missed credit card payments, new car payments) are serious red flags and may indicate financial instability in the near future. Because a mortgage is a form of debt, adding more to your monthly payments is significantly more risky.
You recently switched jobs
Employment history is important to lenders. When applying for a mortgage, lenders will look into your current employment to look for stability. If you’ve recently changed jobs or intend to do so, lenders may disqualify you from a mortgage. Typically, 2 years or more of working for the same employer is standard for mortgage approval. For those that have recently changed employment, you may want to ask your current employer to submit your offer letter to increase your chances of qualifying for a mortgage loan.
You recently accepted money from unverified sources
For some individuals, relatives or friends may help with a down payment by contributing money. These sources of income may be useful to meet the substantial down payment, but they also can be a red flag for lenders.
The reasoning for accepting money from unverified sources is that this payment may not be consistent over the course of a mortgage, leading to defaulting on payments. If you receive a gift from friends or family, you should have a letter stating their intention of contributing to your homeownership.
You didn’t include crucial information on your application
Sometimes, forgetting to include important information on your loan application is responsible for your loan rejection. It’s important to disclose all pertinent information on your mortgage, as loan officers will check this information for accuracy. For example, you may accidentally add an extra zero to your income. Or, you may choose to not include any debts you owe. Therefore, you should be truthful and review the loan application for any potential errors.
What to Do If Your Mortgage Application is Rejected?
If you’re denied for a mortgage, there are several steps you can take to increase your chances of approval in the future:
- Lenders are required to tell you why you were rejected for a loan, so be sure to ask them what you were lacking. It’s not uncommon to ask for advice to make your application more attractive in the future.
- If your debt-to-income ratio is too high, you may need to pay down your debt and/or reduce your monthly expenses. Once your debt is manageable, consider reapplying for a mortgage.
- Seek alternative loan sources. For example, the FHA loan and VA loan offer lower down payments and lower interest rates, making them a common choice among first-time homeowners
- Find ways to earn more income. By increasing your income, you lower your debt-to-income ratio and make yourself a more viable candidate for lending.
- Consider applying through another lender. Lenders have different requirements and you may find one that chooses to work with you.
- Put up a bigger down payment upfront. This not only increases chances of attaining the mortgage, but also secures better terms of the loan, lower interest rates, no private mortgage insurance (PMI), and more.
- Get a cosigner for a loan. Adding other credit-worthy individuals to a loan decreases the risk of default for lenders.