If you have ever had a home loan declined, you know the despair you can feel. Are you stuck renting for the rest of your life? Luckily, you probably aren’t. There are ways you can obtain approval. First, you must find out the reason the bank turned you down. By law, they must provide you with a reason. Once you know the reason, you can fix it. Here we provide tips for the most common reasons for turned down applications.
Credit Issues Causing a Declined Loan Application
A common reason borrowers don’t receive a mortgage approval is credit issues. Several things could stand in the way:
- Low credit score
- Recent delinquent credit
- Too many recent inquiries
- High outstanding balances compared to your available credit
- Recent bankruptcy or foreclosure
There are two ways you can battle credit issues:
- Apply for an FHA loan – They often accept lower credit scores
- Fix your credit – This takes longer but helps you in many other areas as well
Before deciding on the FHA loan, look at your other qualifying factors. Did the lender you applied with have a problem with your income, assets, or employment? These are all important qualifying factors for an FHA loan too. They do accept lower credit scores, but they still require proof you can afford the loan.
Fixing your credit score often has the best results, but it takes the longest. Ask specific questions about your credit. Do you have too many late payments? That’s an easy fix. Start making your payments on time and wait 30-90 days to see your score improve.
If you have high outstanding balances, start paying them down. A good goal is to owe no more than 20% of your available credit. Depending on how much credit you have outstanding, this could take some time. Be consistent with your payments and your score will improve as a result.
If you have other credit issues, it may take longer for the score to increase. Some things just require time. For example, if you have too many recent inquiries, you can wait it out. If these inquiries resulted in new credit, they may not report for a month or two. Once they do, the lender can determine your debt ratio accurately. If you didn’t take out new credit, it will show as the inquiries age.
Other issues, such as bankruptcies and foreclosures, also take time. FHA and conventional loans require a 2-year waiting period after a bankruptcy. Fannie Mae requires a 4-year waiting period after a foreclosure, while the FHA requires 3 years. You can work on re-establishing your credit while you wait for the time to elapse.
A High Debt-to-Income Ratio May Cause Problems
If your debt ratio is too high, lenders may see you as high risk. Each loan program has its own requirements and is as follows:
- Conventional – 28/36
- FHA – 31/43
- USDA – 29/41
However, the funding lender can determine the ratios they will accept. Just because the FHA allows front-end ratios of 31% and back end ratios of 43%, doesn’t mean a lender must accept them. They can tighten their restrictions if they feel it’s necessary.
If your ratios are too high, you have on solution – pay debt off. Start with the debt with the highest payment. This will have the largest impact on your DTI. You can also pay several credit cards down or off to make your DTI lower. Remember, lenders use your minimum required payment for credit card debt for your DTI. Unless you pay your credit card balance down significantly, it won’t affect your debt ratio much. If you can pay several credit cards off at once, though, you can take a larger chunk out of your monthly debts.
Income Issues Often Get in the Way
You may think your income is straightforward. A lender may think otherwise. If your lender won’t fund a loan for you because of your income, consider the reasons. Do they calculate your gross monthly income differently? If you work for yourself or on commission, this could be the case. See what you can change, such as what you claim on your tax returns. If you take too many deductions, it can affect the income mortgage lenders use for qualification.
Because you probably can’t change your income very much, here are a few things you can do:
- Apply for a smaller loan – If your income doesn’t support the loan amount you applied for, try a smaller loan. Of course, this means shopping for a different home, but it could give you the approval you need.
- Put more money down – The less money you borrow, the lower your DTI. This could help you if a lender doesn’t see your income the same way you do.
Income issues are hard to overcome without making drastic changes. Shopping for a different home or saving for a higher down payment both take time.
Appraisal Issues are Tough
A low appraisal is a problem you can’t overcome yourself. You can’t change the value of a home. But, there are a few ways you can get around it:
- Make a higher down payment – You can still buy the home if you can make up the difference between the sales price and appraised value. No lender will give you money above what the home is worth. If you can make up the difference, though, you may secure an approval.
- Change lenders – Different appraisers have different opinions on home values. If the value is close, but not quite enough, consider trying another lender. Keep in mind, most lenders require payment for appraisal upfront, though.
Try a Different Lender to Secure Approval
Keep in mind, not all lenders have the same requirements. Even though governing agencies, such as Fannie Mae and the FHA have standard requirements, lenders have some too. Sometimes shopping with a different lender is all you need.
It never hurts to get a second opinion. In fact, we recommend you get at least 3 quotes from different lenders. This way you know who will approve you and under what conditions. This gives you a comparison of 3 interest rates and closing costs quotes too. You won’t know what different lenders accept until you apply with them too.
A declined mortgage application isn’t the end of the world. It just means you have a little work ahead of you. It may be a few months or years before you can secure a mortgage. But with the right steps, you can make it happen.