One of the most stressful parts of shopping for a mortgage is the uncertainty of it all. In 2013, about 14% of all home purchase applications and 23% of refinance applications were denied. It’s not exactly a rare occurrence, and it’s never fun to a get a “no” from a lender, but it’s definitely not the end of the world. If you are turned down for a mortgage, there are steps you can take to address it so that next time you apply for a mortgage, you’re more likely to get it! So, what do you do when your mortgage application is denied?
Step 1: Find Out Why
The first thing you need to do is figure out what went wrong, otherwise you won’t be able to fix it. When your application is rejected by a lender, federal law requires that they give you a written “adverse action notice” – a litter explaining the reason for the rejection. If you don’t understand the reason given, speak to the loan the officer and ask them to explain the reason in more detail. It’s very important to fully understand what the problem is to take the correct actions moving forward.
There are a few common reasons that loan applications are denied: issues with credit, the appraisal of the property and income requirements. Let’s take a look at each situation.
Poor credit history is one of the top reasons for loan applications being turned down. Too many adverse credit events such as missed or late payments, foreclosures or short sales, or bankruptcies, is alarming to lenders. Sometimes a loan application is denied just because your credit score is slightly too low to meet the lenders underwriting requirements. The key to moving forward here is, once again, understanding the problem.
If your application is turned down because of your credit, you are entitled to receive a free copy of your credit report. Finding and fixing any incorrect or inaccurate information on your credit report is your first priority. After that, the best thing to do is practice responsible credit habits – make your payments on time, eliminate credit cards with high annual fees, etc. Check out our blog on repairing your credit for more info.
Sometimes there are issues with the appraisal of a property that results in a denied mortgage application. If a property’s value is too low to justify the amount you are asking for, it could kill the deal. Let’s break this down:
- LTV (Loan-to-Value) is a percentage comparing the loan amount to the purchase price of a property, ex: if you need a loan for $160,000 to purchase a home for $200,000 (with a down payment of $40,000), the LTV of your loan will be 80% – this is fairly standard for conventional loans.
- The property you are buying is appraised during the loan application, and the appraisal value comes back at $180,000, bumping the LTV up to about 89%. This may be a higher percentage than the lender will cover, and if you can’t restructure your loan, it may be stopped in its tracks.
If you don’t have enough income, or if your history of income isn’t long enough, or if you have too much undocumented income (income that you can’t show where it came from), you may not meet the underwriting requirements of lenders. A consistent history of income, usually at least two pay stubs, or two years’ worth of records if you are self-employed, shows lenders that you are likely to continue to have the income necessary to pay off any mortgage you obtain.
How much money will you have left over after your down payment and closing costs? This is your “reserves,” and it’s usually measured in the number of months you would be able to make your mortgage payments in the event your income was to dry up. Every lender has different thresholds, but most want you to have a least a couple of months of reserves before approving a loan.
If your cash reserves are too low, you can include your securities such as stocks, bonds, mutual funds, and retirement funds – remember that securities are often taken at a discounted rate between 60% and 70% of their full value; or you can wait and put more money in your savings, in which case it’s important for these funds to “season” by sitting in your savings for a while. Lenders like to see at least two months of no big deposits or withdrawals to consider reserves “seasoned.”
So, in the end, there are things that can go wrong and keep you from getting a mortgage loan, but it’s important to not lose hope. Understand why your application was denied and do what you can to fix any issues and increase your chances of getting approved, and try, try, try again!
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