What To Do When Your Mortgage Application Gets Denied

Getting denied for a mortgage can be a tough pill to swallow, but it doesn’t necessarily mean your dreams of homeownership are over. If you’ve been rejected for a home loan, there are steps you can take to strengthen future applications.

What to do if your mortgage application is denied

If a lender rejects your loan application, you’ll receive a mortgage denial letter. This document will include information about why you were refused and which credit reporting agency supplied the credit report used to evaluate your application.

Contact your loan officer

Receiving a mortgage denial “shouldn’t be a surprise,” says Brian Koss, a Winchester, Massachusetts-based regional sales director at Movement Mortgage.

If you had a few potential red flags in your mortgage application, your loan officer should have discussed this with you before you submitted it. Either way, though, it’s smart to schedule a conversation once you receive the denial.

“The lender is supposed to provide you with the reasons you were denied so you can take that info to heart and use it to identify a way to resolve things, so you can get on a better financial footing and re-qualify later,” says Bruce McClary, senior vice president of membership and communications for the ‎Washington D.C.-based nonprofit National Foundation for Credit Counseling.

Ask about other types of mortgages

Even if you were denied for a conventional loan, you may qualify for another type of mortgage. For example, you can consider a government-backed loan, like an FHA, VA or USDA loan. Although these are widely available, you should still confirm that the lender or lenders you’re considering offer them.

You could also contact a mortgage broker, whose job is to match borrowers with lenders. A broker submits your information to their network of lenders, including some that might not work directly with consumers.

Examine your credit

Your credit score is one of the main factors that determines the types of mortgages you’ll qualify for and the mortgage rates you’re likely to get.

After getting a mortgage denial, look for any errors or inaccuracies in your credit reports that could be dragging down your score. And if your score needs work, there are a few ways to improve it before applying for another mortgage:

• Pay bills on time
• Don’t open new accounts
• Pay off credit card balances and other debt
• Become an authorized user on a parent’s or relative’s credit card
• Sign up for credit-boosting programs

Reduce your debt-to-income ratio

Paying off existing debt will also boost your odds of approval in one other way: by reducing your debt-to-income (DTI) ratio. This is a measure of how much of your monthly income you spend per month on debt, such as rent or mortgage payments, credit card bills, car payments and student loans.

Even if you have a solid credit score, lenders will want to determine that you’re not already financially overextended. If most of your income goes toward bills and debt repayments, lenders might question your ability to pay for a mortgage on top of it.

In most cases, you’ll need a DTI of 43 percent or less to get approved for a mortgage. If your ratio is higher, paying down debt will lower it.

Apply with a different lender

Getting rejected for a mortgage can be disheartening, but remember that not all lenders have the same standards. If you’re rejected by one, you may well be approved by another.

However, if you go this route, keep these tips in mind:

• Consider the credit impact. After you’ve been rejected for a mortgage, there’s no minimum waiting period before you can apply for another one. Still, it’s usually a good idea to hold off for a while. Mortgage applications involve a credit check, which can temporarily lower your credit score.
• Don’t limit yourself to a specific type of lender. There are many kinds of mortgage lenders — including banks, credit unions and online lenders — with options for all sorts of buyers. Applying with at least three lenders may help boost your approval odds.
• Ask for help. If you’re a young or first-time buyer with below-average credit, getting approved for a mortgage can be tough. But if your parents have stronger credit and are open to co-signing your loan, you might have more success. Keep in mind that submitting an application with a co-signer is often more complicated because you’ll have to provide additional documentation.

What is a denial letter for a mortgage?

When a mortgage application is denied, the lender provides the applicant with a mortgage denial letter, also known as an adverse action notice. This letter typically includes the following:

1. Explanation of denial: The specific reasons for the loan refusal. These typically relate to the applicant’s finances, employment history or the property itself.
2. Credit information: Details about the credit report used when reviewing the borrower’s application, the credit bureau that supplied it and the credit score listed.
3. Legal rights: Information about the borrower’s rights, including how to get a free copy of the credit report used to evaluate the application. This is required under the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA).
4. Contact information: Contact details for the lender or a representative who can further discuss the refusal and next steps.
5. Reconsideration options: A mortgage denial letter may include information about how the borrower can have their application reconsidered, such as submitting extra documentation, fixing credit or exploring other types of loans.

Why was my mortgage application denied?

Your mortgage application can be denied for many reasons, including:

• Credit problems: Lenders review your credit history to understand how responsible you’ve been with credit in the past. If you have a low credit score or derogatory marks on your credit report, they might consider it too risky to lend you money. A lender might also reject your application if you don’t have much credit history, because it can’t assess how well you manage credit.
• Employment changes: Lenders prefer applicants with stable employment and consistent income. If you’ve recently switched employers or have a pattern of jumping between jobs, your loan may be more likely to get denied.
• High DTI ratio: Your DTI ratio compares your monthly debt commitments to your monthly income. If your total debt is too high, lenders may doubt your ability to take on a mortgage.
• Unexplained cash deposits: You might think that having lots of cash on hand will improve your application odds, but if you received the money suddenly and can’t explain where it came from, a lender may deny your mortgage.
• Issues with the property: Before funding your mortgage, your lender will want to ensure that the property is worth what you’re paying for it. If you have an appraisal gap — that is, your appraisal comes back lower than the purchase price of the home — and you can’t make up the difference, it’s likely to derail your mortgage.

What are the chances of getting denied after preapproval?

If you get preapproved for a mortgage, it is still possible to get denied.

A preapproval doesn’t guarantee financing. Instead, it’s a preliminary agreement from a lender to give you a certain amount of money for a home based on your financial profile.

Typically, if you’re preapproved, you will be approved for a mortgage. However, if the lender has concerns about the specific property you’re buying or finds red flags after digging deeper into your mortgage loan application, you may still be denied despite receiving a preapproval. Similarly, if you switch jobs or take on more debt after being preapproved, your lender may decide not to grant your application.

FAQ

• What happens when funding gets denied after closing?
  

  A mortgage shouldn’t fall through after closing day, but it may fall through just before or on the day you’re scheduled to close. This could happen, for example, due to issues with the property, or if you’ve recently lost your job or purchased a big-ticket item with a credit card. If you find yourself in this situation, consider pausing your home-buying journey to focus on improving your credit or paying off debt.

• Can you get a mortgage with student loans?
  

  Yes, you can get a mortgage with student loans. However, like any other form of debt, student loans can increase your DTI ratio and affect your ability to qualify for a home loan. Lenders consider this when assessing your application and deciding how much money to loan you.

• What can I do if my mortgage was denied due to student loans?
  

  First, review your mortgage denial letter to confirm that your student loans — or overall debt load — were the reason for the denial. If that’s the case, focus on lowering your DTI ratio. You can do this by increasing your income — for example, by finding freelance work or asking for a raise — or decreasing your debt. While it’s not practical for most people to pay a lump sum toward their student loans, if you can reduce your monthly payments — perhaps by signing up for income-driven repayment — you’ll improve your DTI ratio.