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A mortgage application loan denial does not mean that you should give up on your dream of owning a home. There are a number of reasons why some mortgage applications are denied, and, in most cases, a few simple corrections can help you get a mortgage loan approval in relatively short order.
Why Was Your Loan Denied?
The most important thing you need to do after an application denial is to find out why your loan was denied. You may have applied for a type of loan that you weren’t qualified for, in which case you will need to consider other mortgage loan options. If your credit score is lower than it should have been, take a few months to improve your credit rating before applying for another loan. If a home appraisal shows that the home you want to purchase is priced higher than its actual value, this may also result in an application denial. In such an instance, you may need to either consider another home or talk to the seller about lowering the home’s cost.
Of those scenarios, the most common reasons for a rejected application is due to credit. Not only is bad credit taken into consideration, but also a lack of credit can keep you from getting a loan. If you have not been in a position to borrow much money, your credit report will not show a steady history of borrowing and repaying. When lenders can see that you have responsibly paid down your prior debt, they are more likely to approve a loan.
Related Read: Tips to Repair Your Credit Before Purchasing a Home
Another common reason for denial is income. During the application process, lenders calculate your debt to income ratio to determine your ability to pay back the loan. Your monthly income is divided by your monthly expenses, including auto loans, student debt, and any personal debt. The difference is referred to as the ratio, and banks use this number to determine affordability.
Whatever the reason is for the denied application, it’s always wise to double-check the application that was denied in case you made a mistake on the forms and/or failed to submit all required information. If you made a mistake, talk with the lender about submitting a corrected application. You should always inquire as to the reason for the denial, so you can take action to fix the issues and make some changes before you apply again.
Improve Your Chances of Approval
Prior to applying for a loan, it’s a good idea to check on your credit score. Pay down any large debts that show and clear up any discrepancies to build your credit and potentially speed up the process when you approach a lender. It’s also important to realize that it takes time for credit companies to update information, so don’t apply for a home loan immediately after paying off your debts unless you are sure your credit reports show that you are indeed debt-free.
Related Read: How is Your Credit Score Calculated
Keep an eye on your debt to income ratio if you intend to apply for a home loan. Even those who are keeping up with monthly payments can be denied a mortgage loan if they are already paying off a large debt and/or have multiple small debts to pay off. Maintain your income with consistent employment or increase your current income by seeking additional employment prior to applying for a loan to make your debt to income ratio number more appealing to a lender.
You can increase your chances of getting a mortgage loan if you have a sizable down payment to make on your new home. A 20% down payment is ideal, but you don’t necessarily need to offer this amount. Even a 10% down payment can boost your odds of obtaining the mortgage loan of your choice. The more money you can put down on a loan, the lower your loan amount will be and the less your monthly payments will be.
Related Read: Basics on Debt and Mortgage Approvals
