You did everything you could possibly do, but even then you had to walk out of the door empty handed. Getting your mortgage application denied can be a painful experience. But it’s definitely not the end of the world. Many of us go through a similar process. With the approval process becoming more stringent, banks and lenders are turning down more mortgage applications than ever.
Many borrowers get lulled into the misconception that getting pre-qualified for a mortgage is the same as getting pre-approved. Though both involve evaluation of your financial status, it’s a mistake to put pre-qualification and pre-approval on equal footing. While the former requires just a quick scanning, the latter goes much deeper.
There can be one or more reasons to be turned down for a mortgage – Lack of assets, outstanding debts, poor credit history, employment stability issues, high loan-to-value ratio, falling short of qualifying income and sometimes, the borrower simply do not match the lender’s profile. Here’s what one should do after getting turned down for a mortgage.
1. Find Out Why Your Application Got Rejected
Never hesitate to question your lender about the exact reason you were denied the mortgage. Under Equal Credit Opportunity Act, lenders are legally obliged to disclose the details of turning down your mortgage application. In case, your application got denied on the grounds of credit, you should request a copy of your credit report from the credit reporting agency. Once you get your copy, make sure your information in the report is complete, accurate and up to date. If you have reasons to believe that either of them has discriminated against you, you should report it to the concerned federal agency.
2. Improve Your Credit Score
Getting your mortgage application rejected impacts your credit score. The smart thing to do is wait for a few months before making the next credit application. Meanwhile, you should set off for improving your credit score over a set period of time. Begin by taking a closer look at your current financial situation. Assess what resources you have for repaying the debt and how long will it take to regain control of your finances. Small things such as paying your bills prior to deadlines or cutting down the use of credit cards can make big difference to rebuilding your credit.
3. Seek Out Other Lenders and Mortgages
With online portals, it has become easier than ever to start looking for a new lender who understands your mortgage needs better and offers you solutions more fitting to your current financial situation. Also, different mortgages have different qualifying parameters. Getting denied for one mortgage plan doesn’t mean that you get disqualified for other mortgages too. Compared to the Fannie Mae mortgages, FHA/VA loans and subprime mortgages require the borrowers to make much lower closing costs and down payment.
4.Work on Your Debt-to-Income Ratio
Another smart way to get to your feet after a denied mortgage application is to shoot for a lower loan amount. Many a times, the borrowers get their applications rejected because of a high debt-to-income ratio. Debt-to-income ratio is crucial and decides how much loan amount the borrower qualifies for. Some lenders might show flexibility allowing for a debt-to-income ratio upto 45%, but most of them prefer a debt-to-income ratio below 38%. The good thing about debt-to-income ratio is that you can bring it down just by paying off your outstanding debts.
Whatever might be your lender’s reason for turning down your mortgage application, it’s important you stay in the game. As a mortgage buyer all that really matters is that you start working on improving your financial situation while seeking alternative mortgage options.