You started out with such enthusiasm. You decided it was time to buy or refinance a home, so you find a lender. You apply, but after a few days, your loan officer calls you and gives you the bad news: your loan application has been denied. What do you do?
Ask Why You were Denied
First, don’t panic. Mortgage loans are much more difficult to qualify for when compared to just a few years ago, so you’re not alone. It’s perfectly natural to feel disappointed, maybe a bit embarrassed. But in reality, getting declined for a mortgage is also a road map for the future. But first, you need to find out why, exactly, your loan application was turned down.
Speak with your loan officer and ask the basic “why?” question. The loan officer will tell you what went wrong but typically mortgage turn-downs are listed in three basic categories:
- Insufficient Income
Yet your initial conversation with the loan officer doesn’t stop there. Federal statutes require the lender provide you with a formal declination notice, referred to the lending industry as an “Adverse Action” notice.
This letter spells out the reason(s) your loan was declined and provides you with a list of the problems found with the application. Your phone call with the loan officer provided you with the initial reasons, but you’ll get a formal record in the mail.
This means your gross monthly income was not enough to cover your current monthly obligations in addition to a future mortgage payment. Your loan officer should have reviewed this with you before you applied for a mortgage. If the loan officer said your income was fine when later you were told otherwise, then something went awry.
At a loan application meeting or when you apply online, a section of the application is reserved to list all your monthly income. That includes income from your job, interest and dividends, bonuses and income from your business. If the lender initially used all the income listed yet determined later that the documentation provided didn’t back up the income amounts, the income can’t be used.
The most common problem with income occurs when tax returns are reviewed and self-employment income shows a business loss. If you have a side business and it shows a loss, the amount will be deducted from your gross monthly income.
If your loan was declined because of insufficient income, your choices are either to borrow less money by saving up for more down payment or buy a smaller home.
Low Credit Score
If your declination letter states that your application was denied due to information contained in your credit report, it’s likely you’re aware of the issue. Or if the lender needs at least a 620 credit score to qualify and your score is only 600.
Again, your loan officer will tell you specifically what is hurting your credit report. For example, if you have an outstanding collection account you should pay it then wait for a few months and reapply, all the while keeping your payment patterns perfect with your creditors during that time.
If there’s an obvious error on your credit report, document the error and provide the information to your loan officer. Lenders have working relationships with credit reporting agencies and can help get mistakes corrected quickly. If there is no mistake and the derogatory information is correct, only time will heal your credit, typically within 12-18 months.
Not Enough Assets
When turned down for insufficient assets to close, it’s simply a long way of saying you haven’t saved up enough money to cover your down payment and closing costs. A lender makes this determination after reviewing your most recent bank statements.
Lenders like to see consistent, continued savings in your checking and savings accounts and any irregular or undocumented deposits may not be used.
Having enough assets is simple to correct by merely saving up more money, having a seller or the lender provide you a credit for your closing costs or any combination of the two.
Denial due to Lender Error
Lastly, a loan can be declined because the lender made a mistake. This is the best kind of turn-down because it’s something you can get fixed and get your approval back. Lenders make mistakes too and sometimes it takes an explanation of your situation before a lender makes a final decision.
For example, say that the lender declined your loan because you listed part time income that couldn’t be verified. The loan officer saw the income listed on your application but didn’t document it. By providing your income tax returns showing two years of consistent part time work along with documentation from the employer, you can use that in come, helping you to qualify.
The best way to avoid getting a declination notice is to ask as many questions as you can think of before you apply. If you’re not exactly sure if you’ll qualify, speak with an experienced loan officer beforehand. If you can’t qualify today, get your road map to an approval before applying for a mortgage, avoiding a declination letter altogether.