According to the Mortgage Bankers Association, mortgage lenders reject about 30 percent of mortgage applications for new purchases. If you confidently submit your home loan application, being turned down can be a major shock. However, you don't have to take a mortgage rejection lying down.
A mortgage denial doesn't suggest that you’ll never be able to purchase a house. It simply means you’re not an ideal candidate for a home loan at the present time. But don't worry, there’s a lot you can do to get your application approved and move forward with a home purchase.
It’s important to get to the bottom of a rejection. Fortunately, the bank won’t leave you in the dark, and you’ll receive an explanation or reason(s) for the rejection. Understanding why you were denied helps you plan your next move. If you’ve been turned down for a mortgage, here are a few options for getting your loan approved.
1. Ask About a Different Type of Loan
There are different types of mortgages, and each mortgage product comes with its own set of lending guidelines. The trick is working with your lender to find the mortgage that’s best for your situation.
A conventional mortgage loan is a popular option for cash-strapped buyers since it only requires a 3 percent down payment. There is, however, a minimum credit score requirement of 620. If your credit score is under 620 and you apply for a conventional loan, the bank will likely turn down your application. Interested in how to get your credit mortgage-ready? Take a look at our 4 tips.
Being turned down might feel like the end of the world, but this isn't the only option available. You might have better luck with an FHA home loan.
An FHA mortgage only requires a minimum credit score of 580 and a 3.5 percent down payment. You can even get approved for an FHA home loan with a credit score less than 580, but you’ll need at least a 10 percent down payment.
Some lenders do whatever they can to assist homebuyers. If you don’t qualify for one type of mortgage, a loan officer will suggest an alternative. But this isn’t always the case, so it’s your responsibility to speak up and inquire about other options.
2. Talk With Another Lender
Just because you’re rejected by one lender doesn’t mean every lender will reject your application. There is some flexibility in mortgage lending. The bank will look at existing debts and calculate your debt-to-income ratio when considering whether you're eligible for a mortgage loan. Generally, your total monthly debt payments (including the mortgage payment) should not exceed 36 percent of your income.
Some lenders strictly adhere to this guideline. If the monthly payment for your mortgage, auto loan, credit cards and other loans exceed 36 percent of your monthly income, these lenders will not approve your application until you’ve paid off some of your debts. Other lenders, however, are more flexible and allow a debt-to-income ratio up to 43 percent. If a big or national bank rejects your mortgage because of too much debt, don’t give up. Apply with another bank, such as a community bank or a credit union.
3. Clean Up Your Credit Report
Ideally, you should check your credit report before applying for a mortgage. You can request a free credit report from each of the credit bureaus once a year. If you didn't check your credit report before applying, and you were turned down because of credit issues, now’s as good a time as ever to review your credit and clean up your report.
It only takes one credit report mistake to drive down your credit score and prevent a mortgage approval. It’s important that you dispute errors on your credit report, either by working directly with your creditors to remove inaccurate information, or by filing a dispute through the credit bureaus. It doesn’t matter that a negative item was reported in error, lenders will not approve your application until you resolve the matter.
Even if you’re working with the credit bureaus to remove errors off your report, this process can take weeks or longer. And if you pay off a high debt to qualify for a lower mortgage rate, it can take 30 to 60 days for your credit report to reflect this change. Since mortgage approvals are time-sensitive, ask your lender about rapid rescoring. If offered by your lender, the bank can assist with getting your credit file updated.
A creditor may acknowledge a mistake on your credit report. With rapid rescoring, your credit reports are updated within 72 hours. Your lender will first verify corrected or updated information, and then send the appropriate documentation to the credit bureaus. Fees for this service vary by mortgage lender.
If you are having trouble getting your finances mortgage-ready or have been rejected for a mortgage, take a look at our blog for more handy information to get you back on track!