Congratulations! You’ve finally decided to do it: You’re going to take the plunge and buy your first home! You apply for a mortgage, only to receive word that your application has been denied. While that can be disappointing, one roadblock doesn’t mean the end of homeownership dreams. Keep reading to learn what to do if your mortgage is denied.
Contact Your Lender
The lender is legally required to provide you with the reasons you were denied the mortgage. So, you can use that information to identify a way to resolve issues and get a better financial footing to re-qualify later. Sometimes, it could be that the lender requires extra documentation, including bank statements and tax returns, to prove your income and assets, which you can provide quickly to re-qualify.
Check for Errors in your Credit Report
Between the various credit bureaus and creditors involved in developing a credit report, errors are likely to happen. In fact, over 34% of homebuyers will find errors in their reports. Unfortunately, mistakes can lower your credit score, resulting in mortgage application denials. Examples of errors you may find and dispute in your report include the following:
- Incorrect payment statuses
- Outdated information
- Fraudulent accounts
- Wrongfully duplicated negatives
Consider a Different Mortgage Program
Every type of mortgage has different eligibility criteria. For instance, conventional loans require higher credit scores and have fewer leniencies for previous credit mistakes. They also have less flexibility for a higher debt-to-income ratio. So, if your mortgage has been denied, ask your lender if they offer other mortgage programs, including government-backed loans, such as VA, USDA, and FHA loans, which require lower or zero minimum credit requirements.
Check with Other Lenders
It’s important to note that not all lenders have the same set of standards and underwriting guidelines- some might be more stringent than others. Some lenders may also have their set of investor overlays (overlays are additional internal underwriting criteria put in place by every lender). So, if one lender turns you down due to their overlays, you can find another lender with fewer or no overlays to approve your mortgage.
Find a Cosigner
If your mortgage has been denied because you don’t earn enough to qualify, you can consider a cosigner. Some mortgages allow someone who doesn’t live in the home to consign on a mortgage and contribute their income. Just note that the cosigner will be on the hook for the loan if you can’t repay it, and late payments will also appear on their credit.
Establish Credit History
If you’re a first-time homebuyer, it’s likely that you may have not built sufficient credit history to satisfy the lender’s eligibility criteria. If that’s the case, it may be simply a matter of time before you’re ready to apply. To kick start your credit, you can try the following options:
- Becoming an authorized user on your parent’s or other family member’s credit card can help you reap the benefits of their good credit.
- Secured credit cards can allow you to start using credit that’s secured by your funds. After building up your score by using a secured card, you can then secure the conventional credit.
- Credit-builder mortgages are personal loans secured by your duns and repaid in installments. And just like the secured credit card, they can help you slowly demonstrate your creditworthiness.
Build Your Creditworthiness before Reapplying
If your application was denied, there are several steps you need to take to repair it. If the issues are minor (that require quick fixes), for instance if there was missing information, the underwriter can grant you conditional approval.
However, if the mortgage was denied for other reasons, for instance poor credit or low income, it may take some time to fix up your application. So don’t expect to reapply immediately without addressing the issues that came up the first time round.
Need Help Buying a Home? Call the Experts!
If your mortgage lender rejects your application for a loan, all isn’t lost. Follow the abovementioned tips to improve your chances of securing a mortgage with your next application. And if you’re ready to start your homeownership journey, call our experts today! We’ll help you find and buy your dream home!