There probably isn’t anything more devastating during the home buying process than being turned down for a mortgage. You’ve already picked out your house, had your offer accepted and now the lender says, “No.”
But you have options at that point.
“If the denial reasons are specific to credit, income, assets, or property, the borrower will receive a declination letter with up to three reasons for the denial,” said Sylvia M. Gutierrez, loan originator in Florida and author of Mortgage Matters: Demystifying the Loan Approval Maze.
“If there are indications of fraud or misrepresentation, the lender may choose to give no explanations.”
To understand your mortgage rejection and what to do next, here are explanations of what might be going on and what you should do:
Top reasons for mortgage rejection
The main reason someone might get rejected for a mortgage is because they don’t give all supporting documentation upfront. When this happens, the loan officer can’t accurately address all possible risk situations, Gutierrez says.
“As to reasons for denial, we often see tax avoidance — which lowers usable income — and/or poor credit usage. People don’t realize that if they have a credit line of $1000 and are utilizing $998 of it, their credit score can drop by as much as 75 points even if they have no late payments.”
Other explanations for mortgage denial even after a preapproval
There are a few other reaons that a mortgage denial may have happened after a preapproval:
- Home buyers might not have provided verifying information to the lender
- The lender had a different figure estimated for property taxes, insurance, or homeowner’s association dues
- The home buyer decided to buy a new car; or borrowers skipped a mortgage payment, Gutierrez says.
Approaches to change a lender’s decision
Additional assets may help reduce your debt-to-income ratio. These assets don’t even need to go toward the downpayment to have the best effect, she says. You can use the additional assets to pay off debts that have high minimum monthly payments.
Sometimes, doing this is more beneficial than simply lowering your loan amount. Getting a co-borrower only helps if that person has good income in relation to their debts.
Preapproval might not be enough
“A preapproval means nothing if you didn’t provide your lender with supporting documentation that verifies the information that you gave at application,” Gutierrez states.
There’s a difference between prequalification, preapproval, and conditional loan commitment. In prequalification, no credit is checked, and it is accepted verbal information regarding assets, income, and debts.
In preapproval, lenders check credit. In conditional loan commitment, an underwriter reviews credit and verifies income and assets. Potential homebuyers should be working with their lenders toward conditional loan commitments.
No. 1 thing to do after the rejection
Anyone who is denied a mortgage should be checking their credit reports. That’s where they can really make a difference – by correcting errors and adjusting usage.
Gutierrez adds that a higher credit score can be obtained by utilizing no more than 50% of your available credit in any one line of credit or card.
Shop around for another lender after rejection?
“The first thing to do is to speak with the loan officer at the rejecting bank and strategize on making changes that will affect a better outcome next time,” she says.
“When we see a recent credit inquiry, we ask if any new credit was opened. We don’t really care if they were rejected; we care if they took on a new debt.”
If you feel discriminated against, Gutierrez says to report the lender to the Consumer Financial Protection Bureau. According to the Federal Trade Commission, you can also check with your state attorney general’s office to see if the creditor violated state laws. Many states have their own equal credit opportunity laws.
Methods to build credit score if it dropped
First, ask your lender what changed in your credit score. They can tell you, but they can’t show you. This is because they aren’t a reporting agency and have probably signed a contract with the reporting agencies prohibiting this practice, she says.
You’re entitled to receive a free copy of the credit report used by your lender. Review the Credit Disclosure that was given at application for details to contact the vendor the lender used.
Job changes a minus or plus in mortgage qualification
Promotions and pay increases are not a negative, she says. Frequent job changes for no particular reason raise a conc n, but don’t necessarily indicate a reason for denial.
Gaps in employment would indicate an issue and this should be addressed with your loan officer up front to properly document your loan file.
Alternatives to purchase the house anyway
“Find out why you were denied and see what changes you can make that would make a difference,” Gutierrez says. “There are definitely lenders out there who will take on higher risk mortgages at a higher interest rate.”
Your dream house needs to be affordable to you. If it isn’t, set that dream aside and work on improving your situation as it relates to credit, income, or asset deficiencies.
“People aren’t rejected. Loan applications are denied,” Gutierrez adds.
Tweak the application to best reflect your actual situation. Tax avoidance means you lowered the income reported to the IRS.
“While that’s something we all aim to do, it probably isn’t a good idea to be too aggressive with that if you’re planning to buy a home in the next two years,” she says. “Monitor your credit. It’s worth the monthly cost to do so because it may save you thousands of dollars in credit interest charges.”