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 position to get approved.
In this article we’re going to discuss some steps to take if you’re denied a mortgage loan.
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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 41%.
As an example: After factoring in your estimated mortgage payment your total payments are $4000 monthly. You have a before tax income of $10,000 giving you a DTI ratio of 40%. While at the higher end of the spectrum you should still have no problem getting a loan.
If you’re 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 get you a lower payment.
For credit cards this may be done by asking for a lower interest rate, or doing a balance transfer to a 0% interest card. You can also refinance car loans, personal loans, and student debt.
Ways to reduce your DTI ratio
- Refinance high interest debt
- Ask for lower rate from your credit card companies
- Get student loans deferred
- Pay off a loan or credit card
- Get documentation for additional income
Bad Credit Scores
Credit is the #1 reason a mortgage gets denied. Whether the credit score is too low, or there are lots of 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 scores
- Pay down credit card balances
- Get added as an authorized user
- Remove late payments
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 may be 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 is allowed to 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 has been open for several years you should ask if they would be willing to add you as an authorized user.
When you’re added the entire account history of that account 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 it is dependent 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 contract 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.
Speak to 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 you’re denied by one lender, then you should keep on applying until you find one that can get your loan approved.
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FHA Home Loans
Home loans used to require great credit, 20% down payment, and a good job making a solid income. The Government created the Federal Housing Administration in 1934 to encourage homeownership in America.
The FHA acts like an insurance policy on a mortgage loan. If a borrower defaults on the loan, the FHA will pay off the mortgage balance and take ownership of the property, making the loan less risky for lender. If you’re mortgage was denied due to credit or down payment issues then an FHA loan may be the answer.
Home Loans with Poor Credit
Technically you can get an FHA home loan with a 500 score and 10% down. However, many lenders will not be to work with scores in this range. Bad credit mortgage loans are an option for some borrowers you just have to speak to the right lenders.