You finally found the perfect house, and what seemed like a straightforward process yielded disheartening results.
Your mortgage application was denied, and it happened after all the time spent completing mountains of paperwork, answering countless questions, and having long conversations and meetings with your loan officer.
So, after getting angry and cursing the world, it’s time to soldier up and figure out what went wrong so you can fix it.
While having your mortgage application denied is not an ideal situation, it’s not the end of the world.
Potential Reasons Your Mortgage Application Was Denied
According to the Mortgage Market Activity and Trends report, in 2017, one in nine mortgage applications was denied. So, you are not alone.
But, what know?
Well, it’s time to figure out what happened and do something about it. Your first step is to find the reason for your mortgage denial. Once you know what went wrong, you can take care of the problem and try again.
As it turns out, there are several reasons why a mortgage application can be denied. And, get this, a few of them may not even be in your hands.
- Poor Credit History
- Debt-to-Income Ratio
- Recently opening or closing a credit card
- Recent purchase or lease of a new car
- Owing child support or alimony
- Not borrowing enough money
- Poor conduct by the Home Owner’s Association (HOA)
You shouldn’t be too discouraged if your mortgage application was denied.
If you were turned down for any of the reasons above, there are some specific steps you can take to get approved next time around.
Let’s take a closer look.
How to Get Approved On Your Next Mortgage Application
Insufficient credit history and a low credit score are common reasons why mortgage applications are denied. If you shied away from credit cards, it might not have been the best choice.
Although true that credit cards can lead to more debt and a high debt-to-income ratio, using credit responsibly helps build your credit history and score. Lenders want to see that you are able to borrow money and repay it.
To build your credit history and score, be sure to put regular expenses on your credit card and to pay off the balance each month.
Keep in mind that your payment history makes up a whopping 35 percent of your credit score.
The debt-to-income ratio (DTI) compares your debts to your overall income. It helps lenders see how you handle your money.
It is considered to be the key factor in determining your creditworthiness when applying for a mortgage.
The ratio is calculated by dividing your total recurring monthly debt by your monthly gross income (income before taxes).
The debt-to-income ratio tells lenders whether you’ll be able to make your monthly mortgage payment based on your monthly debt.
The maximum DTI ratio for a would-be home buyer is 43 percent. It’s common for borrowers who have a higher debt-to-income ratio to run into problems trying to meet monthly payments.
The lower the debt-to-income ratio, the better. If your mortgage denial was due to a high DTI ratio, your best bet is to increase the monthly payments toward your debt, effectively lowering your overall debt and decreasing your DTI.
Recently Opening or Closing a Credit Card
Recently opening or closing a credit card adversely affects your credit history. Although it is true that having some credit card debt shows lenders that you know how to manage credit, you should refrain from applying for new credit at least six months before applying for a mortgage.
Remember that whenever you apply for credit, lenders check to see your credit utilization, which generates a hard inquiry that is reflected on your credit score. However, it’s not just applying for credit that affects your score.
Make sure that you don’t close any accounts either. If you do close an account, your credit score could decrease since you are removing the available credit, thus increasing your credit utilization percentage.
One thing that can prevent this situation is having made appropriate use of your other credit cards by maintaining low balances or better yet, paying the full balance every month.
If this was the case, monitor your score, pay as much debt as you can, and when the numbers are on your favor, apply again.
Recently Purchasing a New Car
Did you recently purchase or lease that new car you were eyeing? If so, you added an extra obligation that increases your monthly debt and your debt-to-income ratio.
If the new debt carries you over the 43 percent limit, there’s a very high possibility that your mortgage application will be denied.
Remember: A higher debt-to-income ratio means that more of your money goes out to creditors, and as lenders see it, you have less money to make mortgage payments.
And if that wasn’t bad enough, your credit score just dropped a few points as well. I’m not saying that you should not buy that dream car of yours.
However, you have to decide what’s more important at the moment. And if you are reading this, I’m guessing that it is the house.
Owing Child Support or Alimony
Owing child support or alimony will be considered to calculate your debt-to-income ratio as it is part of your fixed monthly expenses and, as such, counts toward how much of your money is tied on obligations.
Regarding your credit history and score, if you pay as agreed all is well.
Making child support payments on time is not included in your credit report. However, if you have back-child support, it can be reported to credit agencies.
Additionally, if there is a collection effort, it will show up on your credit report and can lower a high credit score by about 100 points.
If the collection shows up on your credit report, the negative information can remain on there for up to seven years.
If you owe child support, be sure to tackle the debt before the matter reaches a collection agency.
Not Borrowing Enough Money
Not borrowing enough money can also be the culprit of your woes. Many lenders have minimum loan requirements, and if you intend to borrow less than the institution’s minimum amount, your mortgage will be denied.
For example, if property values in your area have significantly dropped, and the amount you need to borrow is less than $50,000, large financial institutions could deny your mortgage application.
To some lenders, it’s not worth the trouble of approving a loan under $50,000; it’s just not profitable.
If that is why your application was denied, you merely need to look elsewhere.
Credit unions or community banks are good options because they can offer mortgages for significantly lower amounts.
Poor Conduct by the HOA
Poor conduct by the Home Owner’s Association (HOA) along with several other factors could make your condo non-warrantable in the eyes of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
When the Home Owners Association is named in lawsuits, the project is not completed, most of the units are rented to non-owners or are short-term rentals, or the developer is still in control of the condominium, your mortgage might be denied, or the interest rates can be higher.
Not because of your credit but because of the high risk involved. If that is the case, you may want to look for another condo, or you could make a more substantial down payment.
Lesson learned? Great! Now you know that even though a mortgage application denial might feel like the end of your home ownership dreams, it doesn’t have to be.
Your best bet is to understand what happened. With that knowledge in hand, you can get back on track to financing your home.
After you know exactly what went wrong, you can tackle it, fix it, and try again.