With rates this low and housing prices at levels not seen in years, now could be the best time to buy a home.
Due to tight lending standards however, some would-be home buyers are being declined for mortgages.
Fortunately, even though your mortgage application may have been denied, there are a number of things you can do.
FIND OUT WHY YOUR LOAN WAS DENIED
Assuming you’ve submitted a formal loan application, if your mortgage application has been declined, by law lenders must provide a formal denial letter. This letter is typically known as a Statement of Denial, sometimes called an Adverse Action Notice.
If you still have questions after receiving your denial letter, call your lender and ask for clarification. You have a right to know and understand the reason for which you were turned down.
Common reasons for credit denial include:
- You can’t source enough funds for your down payment.
- Your debt-to-income (DTI) ratios are too high.
- Your credit scores are too low, or you don’t have enough credit.
- Your loan-to-value (LTV) ratios are too high.
FIND OUT WHAT OTHER OPTIONS ARE AVAILABLE
It’s important to understand exactly why your mortgage loan was denied so that you can figure out the best course of action moving forward.
That way you can decide if you should press the issue with your current lender, if you should apply elsewhere or lastly, it may be best to just put things on hold for now.
Note – don’t make the assumption that your lender has exhausted every option with regard to your loan approval.
Depending on the lending institution itself, the experience of your loan officer, and how many sets of eyes have seen your loan application, it’s possible that your lender simply overlooked a rather simple solution. Sometimes, a friendly suggestion could actually help your lender think outside of the box.
There are also times that you may be turned down for reasons that, although may disqualify you for one loan, don’t disqualify you for every loan.
For example, if your application was denied due to your credit score being too low for a conventional loan, perhaps you’d qualify for an FHA mortgage loan.
Conventional loans typically require higher credit scores, have less leniency for previous derogatory credit, and have greater limitations with regard to debt-to-income ratios than that of their FHA counterpart. Furthermore, you could qualify for a conventional loan but end up with a lower mortgage payment had you gone with an FHA loan.
Bear in mind that sometimes, your lender may not actually have the loan option that you need. That doesn’t mean the option isn’t available elsewhere however.
Some lending institutions don’t offer government loans. Others may not offer adjustment rate mortgages. A lower rate on a conventional 7/1 ARM, or an FHA loan could be the difference in getting you into that new home.
OTHER WAYS TO GET YOUR MORTAGE APPLICATION APPROVED
The fix for your credit application could be just a couple of quick fixes on your credit report. If it’s a matter of just a few more points on your credit scores, your lender may be able to advise you on how to increase your credit scores with the help of a rapid-rescore.
Non-occupied co-signers may be another option for someone who has been turned down due to their debt ratios exceeding the standard limits.
If you were turned down to the appraised value, it may be worth looking into using another lender. Different lenders often use different appraisal management companies.
Ideally, the appraised value would be consistent from one appraiser to the next. Because appraisals are considered opinions of value, one appraiser may come up with a higher opinion of value than the one used for your loan.
WHEN ALL ELSE FAILS, WAIT AND THEN TRY AGAIN
Even if you’ve exhausted your options for qualifying for a mortgage loan at this time, don’t let that get you down.
Folks that didn’t qualify one year ago may actually qualify now due to new loan programs coming available. Assuming that trend continues, even though you can’t qualify today, you could qualify for a mortgage in the very near future.