Buying a home is often a tedious process; there are many hoops to jump through and many factors to consider. But perhaps the most challenging part of the entire process is applying for a home loan, mainly because it is what is going to determine whether you can actually buy a house or not.
Home loans are not always easy to acquire—at least not the ones with reasonable interest rates. To qualify for a home loan, you must meet a set of criteria that the lender uses to evaluate its potential borrowers. If you don’t meet these criteria, then it is likely that your application will be denied.
Common reasons for a mortgage application denial include:
A lender needs to see a significant credit report so that they can evaluate you accordingly. If you have yet to build a substantial credit history, hold off on applying for a mortgage until you do so because you will likely get a denial.
Aside from your credit report, the lender will look at your debt-to-income (DTI) ratio to evaluate your worthiness as a borrower. For most lenders, the ideal DTI is 36%, with no more than 28% of that going to the mortgage.
A recent job change
Lenders want to see job stability in their borrowers, which is why they usually require applicants to have stayed in a job position for at least two years. That said, if you have recently gone through a job change, your mortgage application may be denied. But if your new job is very similar to your old one, you may have a chance to get approved.
Bad credit score
The credit score is an essential determinant of how much your mortgage interest rate will be—or if you even get approved in the first place. Conventional lenders generally prefer borrowers who have a credit score of 720 or higher. However, if you qualify for a government-backed housing loan, having a credit score lower than 720 can still allow you to secure a mortgage.
What to do if your mortgage application is denied
It is not the end of the world. If you receive a denial, here are what you can do next:
Find out the reason for denial
Lenders are required to tell you why they denied your application, and the reason for denial must be clearly outlined in a letter. If your application is denied, you will receive a denial letter in the mail, including all the details. Be sure to read what the document says to determine what you need to do to improve your chances of an approval next time.
If the letter is vague or incomplete, contact the lender and ask them to clarify the reason for your denial. If they are incorrect in any way, don’t hesitate to explain the situation—you may be able to turn around the denial with the right moves.
Work on your credit score
The higher your credit score is, the better are your chances of getting your mortgage application approved. If a poor credit score is the reason for your denial, set about increasing your score as soon as possible. Pull up a copy of your credit report and review it for any mistakes that you can dispute. If you can increase your credit score by contesting certain items on your credit history, you may be able to ask the lender to reconsider.
Otherwise, start working on increasing your credit score. You can do this in many ways such as paying your bills on time, keeping your credit utilization low, and keeping unused accounts open.
Downsize your debt
Decreasing your DTI ratio is another great way to increase your chances of a mortgage approval the next time around. To do this, work on paying down your debts until your DTI ratio (with the potential mortgage) is at 36% or less. You can also consider consolidating your debts to lower your monthly payments and reduce your DTI ratio in the process
In the meantime, it is also imperative that you do not take on any additional debt, be it personal loans, auto loans, or credit card debt.
Getting denied on your mortgage application is certainly not the end of the road for your homeownership dreams. It is only a roadblock that signifies you have something to work on before you can become a fully-fledged homeowner. If you get a denial in the mail, use this guide to increase your chances of an approval for your next application.