What to do if You’re Denied for a Mortgage Loan

Getting denied for a mortgage is a heartbreaking ordeal.

However, it doesn’t have to be the end of the world.

There are some things you can do to get in a position to get approved.

In this article, we will discuss some steps to take if you’re denied a mortgage loan and other mortgage programs you may qualify for.

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Why Your Mortgage got Denied

To figure out your course of action after your loan is denied, you’ll need to know why it was denied in the first place. One of the more common reasons is having a low credit score.

It’s important to note that not all lenders have the same minimum credit score guidelines. Some lenders can work with a 640 score, while others have lower minimum credit score requirements for a mortgage.

Having bad credit is one of the easier fixes there is. A little later on, we will go over some tips to boost your FICO score, so you meet the minimum credit requirement. Here are some of the more common reasons borrowers get denied a mortgage loan.

Reasons a mortgage gets denied

  • High debt-to-income ratio
  • Poor credit history
  • High debt
  • Unverifiable down payment
  • Undocumented income
  • Self-employed for less than 2 years

High Debt-to-income Ratio

Your debt-to-income ratio (DTI) is the amount of your monthly debt obligations compared to your monthly income. Most mortgage lenders do not want to see a DTI ratio that exceeds 43%.

If your DTI ratio is too high and you need to reduce it to qualify. You should look at your open accounts you make payments on to see if you can reduce the payments or pay off and close the account. You can contact your creditors and see if they will work with you to lower payment.

This may be done by asking for a lower interest rate or doing a balance transfer to a 0% interest card for credit cards. You can also refinance car loans, personal loans, and student debt.

Home Loans that Allow for DTI Ratio of 50%

FHA Loans – The FHA loan requirements are less strict than conventional loans. FHA loans require a 580 credit score with a 3.5% down payment. DTI ratio up 50% is allowed with compensating factors.

USDA LoansUSDA loans are for low-income borrowers whose income is less than 115% of the area median income.

VA Loans – Veterans of the U.S. military are eligible for VA loans that have low credit score requirements, no down payment, and DTI ratios up to 50%.

Home Possible and HomeReady LoansHome Possible and HomeReady loan programs are for low-income first-time homebuyers, require a 620 credit score, and no down payment.

Bad Credit

Credit is the #1 reason a mortgage gets denied. Whether the credit score is too low or there are any late payments or collection accounts, credit is a huge roadblock to homeownership.

Ask your loan officer exactly what on your credit is holding you back from getting approved. If it’s because your credit score is too low, here is what you need to do.

How to Improve Your Credit

Pay down your credit card balances

The balance on your credit card accounts compared to the credit limit is called your credit utilization ratio. Credit utilization accounts for 30% of your overall FICO score. Only your payment history (35%) has a larger impact on your credit rating.

Ideally, you want to keep your card balances below 15% of the credit limits. This will make a big difference in your credit rating and maybe just enough to get you qualified for that home loan.

Get added as an authorized user

An authorized user is a second person added onto a credit card account who can use and access the account if you have a close friend or family member with a credit card in good standing.

It should have no late payments that have been open for several years. You should ask if they would be willing to add you as an authorized user.

When you’re added to the account, the entire account history will appear on your credit report. FICO does consider authorized user accounts into their credit scoring algorithm. Your score will increase. The amount it will boost depends on many factors, but it could be between 10-30 points.

Get late payments removed

Most mortgage lenders require you to have no more than a single 30 day late payment in the past 12 months to qualify for a mortgage. If you have late payments, you can contact your creditors and ask them to remove late payments from your credit report. In some cases, they as an act of goodwill for a long-standing member.

If that doesn’t work, you can dispute anything with the credit bureaus directly. The credit bureau has 30 days to validate the account, or it must be removed by low.

Compare Loan Offers from Multiple Lenders

Just because one lender denies your mortgage doesn’t mean all lenders will too. Each mortgage lender has their own set of mortgage requirements. If one lender denies you, you should keep on applying until you find one that can get your loan approved.

When a lender approves you they will send you a loan estimate detailing the estimated costs of the loan. You can take that loan estimate to other lenders to negotiate better loan terms.

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