What to Do When Your Mortgage Gets Declined
Of all rejections a person has to face in life, a declined mortgage is probably one of the rejections that will set you back the most. Not only will your dreams of owning a home get quashed-- you will also find yourself wondering what went wrong that led lenders to conclude you are not worth the risk.
But here's some consolation for you: one rejection doesn't mean you will no longer be able to own your home. In fact, there are three common reasons why your mortgage got rejected, and you can actually remedy the situation with the right strategy. Here are the three most common issues that lead to a denied mortgage application, and some tips on what you can do to address the problem:
Rejected because of... low credit score
A low credit score is the most likely reason why your mortgage got declined. But don't worry, you're not alone; studies show that the average American household has $15,762 in debt. Credit scores are rated out of a perfect score of 850, but only 0.5% of the population have that rank. Don't aim for a perfect score (with college loans alone, 850 is impossible); all you need is to have at least a 620 rating if you want to use a conventional loan, or 580 for FHA loans.
If you rank lower than that and got rejected, the first thing you have to do is ask the lender the reason why your credit score is low: a report will likely show the basis for your score. Is it credit card debt? If so, you have to start paying your bills on time and try again in a few months. Succeeding records of payments made on time can help nurse your credit score back to health.
Rejected because of... debt-to-income ratio
If you got rejected because of your debt-to-income ratio, it simply means that you have too much debt that your lender feels your income might be insufficient to pay for all of them, and adding more in the form of a home loan can make it more difficult for you to pay up. One way to go around this is to get a second, even a third job, but that's easier said than done. Our advice? After one rejection, file an application with another lender, one at a time, until you get approval. Since lenders each have their own ways of computing your income (some include bonuses, some don't) you're more likely to find a lender who is willing to give you approval if you become more proactive in finding the right match. However, DONT file several applications at the same time, as this will affect your credit score.
Rejected because of... low down payment
The norm for home purchases is that home buyers shell out 20% of the selling price as a down payment. However, 20% DP is merely ideal and not actually required. FHA loans allow home buyers to make DPs as low as 3.5%; VA loans require none. If the down payment you can afford is less than 20%, your lender might not approve your mortgage. If a lender approves your application, you have to check one thing before you get all too excited: if the DP you made is too low and they approved it, you might get higher-than-usual interest rates.
It's still best to make a large down payment, and you can do so by saving up, tapping into your retirement accounts, or asking help from family and friends. The idea is to work on getting the best rates, and not actually getting a loan approved with very low DP (since the rates and not the DP will make your payments balloon over time).
The original article from which this post was based can be accessed here.