You’re beginning your home-buying journey and you come to a road-block — your mortgage is denied. Don’t panic! Just because your initial mortgage application has been denied doesn’t mean you need to give up your dream of becoming a homeowner.
Mortgage denial letters can actually help you improve your chances of approval on your next application, and get you one step closer to proudly owning the home of your dreams.
Common Reasons for Mortgage Denial
Mortgage denial is a lot more common than you might think. In 2018, approximately one in every nine loan applications to purchase a new home were denied.
Luckily, lenders are required to provide specific reasoning behind your mortgage denial within 60 days, so you won’t be left in the dark. The most common reasons for mortgage denial include credit history issues, a high debt-to-income (DTI) ratio, or insufficient down payment and asset reservations.
[Related: In a Hurry? Tips to Close Your Mortgage Quickly]
Less Common Reasons for Mortgage Denial
Less common reasons for mortgage denial could be because you recently made a large purchase with newly opened credit, mysterious bank activity like large, unexplained deposits, or a recent change in your job (new job, loss of job, income change, etc.).
Steps to Take After Mortgage Denial
The steps you take after having your application denied and receiving explanation from your lender really depend on the reasons you were denied.
Poor or Insufficient Credit History
If you were denied based on your credit history, go through your credit report. Look for errors and disputable items. According to a recent Consumer Reports investigation, over one-third of Americans found at least one mistake on their credit report.
If you have a low credit score, find out how long something will take to fall off the report or pay off anything left in collections.
[Related: Expenses to Know About Before Buying a Home (Beyond the Down Payment)]
Alternatively, maybe you don’t have sufficient credit. Take the right steps to build healthy credit, including making on-time payments to a credit card or loan and keeping the percentage of available credit low.
High DTI Ratio
Having a high debt-to-income ratio is at the top of the list of reasons why your mortgage approval might not go through.
If this is the case for you, you need to take steps to lower your DTI ratio before reapplying. Find ways to increase your income, pay down your existing debt, and avoid taking on new debt.
Low Down Payment Reservations
If the reason for your mortgage denial is that you had low or insufficient down payment reservations, the answer is simple: save more money. Put more money aside so that you can make a sufficient down payment.
The “norm” for down payments has typically been 20%, but that isn’t always the case. You can find low down payment options such as FHA loans, Piggyback loans, or HomeReady™ mortgages, or even seek no down payment mortgages if you qualify for VA loans or USDA loans.
[Related: Six Mistakes New Homebuyers Make]
Reapply for a Mortgage
After taking the appropriate steps to increase your chances at mortgage approval, you’re going to want to reapply.
If you’re thinking of applying again with the same lender, they might have rules and regulations revolving around how long to wait before you reapply. Make sure that you meet the new criteria before you reapply with the same lender.
You might also consider reapplying with a different lender. This is sometimes recommended, since shopping around for different lenders can ensure that you’re getting the lowest rate and the best fit for your particular needs. Since different lenders have different requirements, you could be approved more easily than with another lender who denied you.
Worried about multiple applications impacting your credit? You’ll typically be in the clear if you’re applying to multiple lenders within the same 30- or 45-day window.
[Related: 2021 Housing and Mortgage Trends]
Reconsider Your Potential Property
Sometimes the issue isn’t so much your credentials but the home in question. If you’re looking at a property in an area with a high-cost of living, like Seattle, Los Angeles, Hawaii, or New York, you might need to reconsider if you can truly afford it.
Think about moving to a more affordable area, or if you’re really set on living in a specific area, choose a condo instead of a house, or a home without ties to a homeowners association (HOA).
Other options would be to consider a foreclosed property or a fixer-upper, and apply for a home loan that helps you finance the purchase price plus the cost of renovation.
[Related: Guide for Renters Curious About Owning in Seattle]
Connect With a Mortgage Professional
Whatever you do, don’t be discouraged. Several things can directly impact an underwriter’s decision to deny your loan application, and dealing with them directly can drastically improve your odds at approval in the future.
One of the smartest things you can do is to contact a mortgage professional, like those at Seattle Mortgage Planners. We can help you take the right steps to find the perfect loan for your situation, and even give you great resources on increasing your odds at approval and finding the best place to move.
Contact Seattle Mortgage Planners today!
