Looking to buy a new house or refinance your existing mortgage? Being turned down by a mortgage lender, especially after preapproval, can be a huge disappointment. But before you give up hope, let’s take a look at why your mortgage might have been denied and your options for improving your credit so you can reapply – and ideally get the house (and loan!) of your dreams.
Credit is more important than ever as we enter a new, uncertain economic reality, and mortgage requirements have tightened up in order to keep the housing market from bottoming out. This means that your credit history is increasingly under scrutiny as lenders aim to mitigate their risk.
But with a few financially savvy steps, you can be on your way to getting approved. Let’s dive into some options to get you in a house as soon as possible.
Denied For A Mortgage Loan? Identify Why And Take Action
The first step is to return to the source. If anyone knows why you’ve been denied a mortgage, it’s going to be your lender. And according to the Equal Credit Opportunity Act, lenders are required to tell you why you’ve been turned down, if credit played a role. They must include a letter with the specific details, as well as the name of the credit reporting agency that supplied the information they were using. That can help pinpoint the areas where you might need to change some habits to shore up your credit.
But remember, that’s just the first step. If you believe the letter was vague or inaccurate, contact your lender to explain your misgivings. They want your business, so they’ll be eager to have a conversation and help you dig up the root of your credit issues.
What Can Stop You Getting A Mortgage?
While credit issues are a common reason that people might be denied a mortgage, they’re not the only reason.
Here are a few more that might be hampering your efforts:
- Insufficient credit: If you don’t yet have a significant credit report, the first step is to get your credit history started so that your lender has some idea of how you manage credit and debt. They want to see that you can responsibly pay it back.
- Insufficient income: Lenders will calculate your debt-to-income ratio to make sure that you have adequate monthly income to cover your house payment, in addition to other debts you might have.
- A job change: Lenders prefer stability in both your income and your job. With a new job, they might worry that you won’t have the same income potential you’ve shown in the past, which can make them wonder if you’ll be able to repay your mortgage. While it’s not required, typically lenders prefer you’ve been with the same employer, or in a very similar positon, for at least 2 years.
- An unexplained cash deposit: What could be wrong with too much cash, you ask? Well, if a mortgage lender sees this, they might be worried that you were gifted the money and might have to pay it back. They’ll want to know the source of any funds.
One of the reasons it’s important to apply for a mortgage prequalification is that it can give you a view into whether your application will ultimately be accepted or denied. However, in rare instances where your situation changes drastically between a prequalification and the mortgage closing, it’s possible to be denied at closing. To help prevent that, keep in close contact with your lender throughout the process as they can help you avoid actions that can adversely affect your ability to get a mortgage.
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What To Do If Your Home Loan Is Denied
As mentioned above, there are a number of reasons your home loan might be denied. The one that’s easiest to solve is building or rehabbing your credit. Here are some ways to do so.
If You Need To Build Your Credit
Secured Credit Cards
A common way to get started is with a credit card secured by your own funds. If you put down $1,000, for example, your credit limit would be $1,000. After you’ve had this for a while and built your score up with on-time payments, you can move to a traditional credit card.
Another good way to build up your credit if you’re new to this game is to piggyback on someone else’s good credit. For example, parents might add their child as an authorized user in order to let their child reap the benefits of good credit, with the parents still being responsible for the bill.
Another way to build credit would be to take out a credit-builder loan. These go by different names, but in essence they’re personal loans that are secured by the borrower’s personal funds that are repaid in installments. Local banks and credit unions may work with you on these.
Other types of credit-builder loans function much like the secured credit card. Instead of getting all the personal loan funds at once, you’re given an account to use as a line of credit that you make monthly payments toward.
If You Need To Rebuild Your Credit
If you aren’t new to credit, you might have a credit score lower than you’d like. But, with the correct steps, you may be able get it to where you want it. Here’s how:
Fire Up The Credit Monitoring
The best way to get the ball rolling on rebuilding credit is by monitoring it. Rocket HQSM offers an excellent way to start doing that by letting you view your Equifax® credit report and score for free once a month. You’ll also be able to track your monthly debts and your credit utilization and get personalized tips for improving your score. Having more insight into your credit on a regular basis will help you with everything we’re going to discuss in the upcoming sections.
Trials And Errors
Between the credit bureaus and the creditors that play a part in developing your credit report, mistakes are bound to happen every now and then. These errors can lower your credit score and be a big headache to fix.
Common errors include outdated information, incorrect payment statuses, wrongfully duplicated negatives, and most importantly, fraudulent accounts. Eliminate any chance of error by sifting through your credit report with a fine-toothed comb. If you find anything that looks unusual, take the proper steps to dispute your credit report.
Pay Down Debt
One of the best ways to improve your score is to pay down any debts and pay off any collections showing on your credit report. If it’s unrealistic for you to pay off the whole amount, try to work out an arrangement with creditors to pay what you can, which will show up on your credit report as “paid as agreed.” While it won’t raise your credit score as much as paying off the debt in full, paying something is better than nothing.
Keep Accounts Open
When you pay your debt down, try not to close the accounts. This could hurt your score because you want to have a variety of accounts open. You want to make sure you have a mix of credit cards, auto loans, student loans and potentially personal loans to show you’re adept at handling credit.
While you want to pay down debt, it can hurt your credit score to completely close an account because it will eliminate the amount of credit you have available. If you close an account, even if you spend the same amount on your other credit cards, you’re using a larger percentage of your remaining available credit. That’s what’s known as “credit utilization,” and if you use too much of your credit, future creditors may be hesitant to extend loans and other credit to you.
Pay On Time
Another factor lenders look at when you apply for loans is whether you make payments on time. Paying your bills when they’re due will improve your score.
As mentioned, another big key to increasing your score is to have a good mix of revolving credit debt and things like installment loans, such as an auto or personal loan. Mortgage lenders want to see that you can effectively manage different types of debt. Just make sure to pay them on time.
Increasing Credit Limits?
A good second phase of your credit score rebuild after you’ve shown your hard work is to try and get your credit limits increased. For example, if you currently have a $500 credit limit, a lender might be willing to increase it to $1,000 once they see the strides you have made.
In order to keep your credit score high, you don’t want to use too much of it, as this can be a sign of financial stress. The experts at Rocket HQ recommend using no more than 30% of your overall credit limit between all of your accounts. So, for example, if you have one credit card with a $1,000 limit and another with a $3,000 limit and total carryover balances of $800 per month between the accounts, your credit utilization would be 20% ($800/$4,000).
Loan Declined: When Can I Apply Again?
If you’re denied a mortgage, you might worry that it will leave a trail should you attempt to try again; the good news is that while your credit report will reflect that you applied, it doesn’t show that you were denied. And it will only mildly impact your credit – it will show as a “hard” pull, meaning that others will see that you were applying for credit, but servicers understand that can happen when you’re shopping around. In other words, being denied a mortgage shouldn’t impact your credit.
The journey to reapplying for a mortgage after being denied can feel like an uphill battle, but bolstering your credit score is an important step. It won’t happen overnight, but putting some new habits and best practices in place can make you a more likely candidate the next time you apply.
You can contact your Home Loan Expert today and craft your game plan for being approved.
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