Having your mortgage application denied can be crushing. You’ve done all the hard work and found a home you want to live in … and now you’ve been told it’s not possible. What next?
Figure out what went wrong
Understanding why your application was denied is the first step to getting back on track in your homebuying process. First, reference your denial letter. Most list the exact reason for the lender’s decision in the letter. If it doesn’t, contact the loan officer you worked with to submit the application – they’re legally required to tell you why your mortgage application was denied.
According to Experian, most mortgage denials are because of one or more of these issues:
- Poor credit
- Insufficient income
- An excessive debt-to-income ratio
Let’s look at each issue to help you understand what you can do to get your homebuying process back on track and avoid being denied for a mortgage again.
Mortgage Denial Issue 1: Poor credit
Everyone has credit reports and a credit score, and it’s important to have a clear view of what it is before applying for a mortgage or another major loan. Not only will it help you to avoid the disappointment and surprise of being denied for a mortgage, it will also help you spot identity theft and correct inaccurate information that might be hurting your credit.
It’s also worth noting that your credit doesn’t just affect home or auto loans – it can have an impact on your rent applications, job search and insurance costs.
What should I do if I was denied for a mortgage because of poor credit?
- Get copies of your credit reports and look for inaccurate information or evidence of identity theft. The process of correcting these issues isn’t always easy, but it’s important to remove incorrect data that might be affecting your credit.
- Avoid hard inquiries ahead of applying for a mortgage next time. Hard inquiries are items on your credit report that show another lender accessed your report while considering lending you money or extending you credit – like applications for credit cards and auto loans. Soft inquiries are credit checks by insurance companies, employers and pre-approved credit offers – or even you checking your own credit report. Soft inquiries don’t have an impact on your credit score.
While the impact of one hard inquiry isn’t huge or long-lasting, it could bump you out of a preferred range for a lender. It’s best to avoid applying for credit or loans for other big purchases within a few months of when you apply for a mortgage. Avoid clustering applications for credit or loans together, as those can add up to hurt your score more.
- Work on building your credit. Make sure you’re making payments on your credit cards and loans on time, every time. Lower your credit utilization ratio (the amount of credit you use compared to the amount available to you). Pay down or pay off cards, but don’t close older cards – doing that will shorten your credit history and hurt your score.
Mortgage Denial Issue 2: Not enough income
It would be amazing to wave a magic wand to increase our incomes. Unfortunately, that isn’t reality. On your next mortgage application, make sure you’re including all valid forms of income. Don’t forget Social Security income, disability payments, alimony payments, and any income from part-time jobs or a side hustle.
All mortgages – and the qualifications to get them – aren’t the same. Work with a trusted, experienced lender to find a mortgage that’s right for you and your situation.
Mortgage Denial Issue 3: A debt-to-income ratio that’s too high
Sometimes you have a sufficient income, but large debts create a concern for your lender and lead to a mortgage denial. If you’re already committed to other lenders and repaying those debts takes up too much of your income, you won’t be a favorable candidate for a mortgage.
What is my debt-to-income ratio?
How much you owe versus how much you make is referred to as your debt-to-income (DTI) ratio. While different lenders will have their own limits, the general consensus is to aim for a DTI ratio of 36% or lower.
How do I calculate my debt-to-income ratio?
You can find your DTI ratio simply by dividing your monthly debt by your monthly income. For example, with a monthly income (before taxes) of $4,000, credit card payments of $150, and student loan payments of $200, your DTI ratio would be 350 divided by 4,000, or 8.75%.
How do I fix my debt-to-income ratio?
It’s helpful to either grow your income or lower your debts to make sure your DTI ratio is favorable to lenders before your next application. But if your DTI ratio is a little high, rest assured that many of today’s lenders also consider your credit score and savings in the bank, potentially offsetting your ratio.
Win on your next mortgage application
If your mortgage application was denied, it’s not a great idea to apply several other places right away. That creates multiple hard inquiries on your credit report, and it’s better to take some time to investigate any issues with your credit, income, or debts, and address them before turning to another lender.
As you go through the process, make use of checklists and calculators to help you ensure you’re prepared for your next application.
However, if you’ve done your research and feel you just caught a bad break, you can try another application – just don’t overdo it. When you’re ready to try again, look for a lender that you can build a relationship with and has access to a wide range of mortgage options to find the right fit for you.
At Guardian, our loan originators want to help you get into the home of your dreams. Contact us today to find out how we can help you reach your homeownership goals.
CONTACT A LOAN EXPERT