About one out of every nine loan applications to buy a new house (10.8%) and more than one in every four loan applications to refinance a home were denied in 2018, according to data from the Federal Bureau of Consumer Financial Protection. There are lots of reasons someone may be denied a mortgage.
It’s not the end of the world if your mortgage loan application was denied but it can be jarring. It may take time, but you may still be able to buy a home.
The reason for a mortgage loan denial isn’t always something as simple as being overextended on your current loans or having several accounts in collections.
In many cases, an application can be denied because of small things. Here are some common reasons why you could get denied for a mortgage:
You recently received a new credit card or applied for a personal loan
Getting a new credit card, applying for a personal loan or taking on any new debts before putting in an application for a mortgage can decrease your chances of getting the loan approved.
This is because mortgage lenders look at your debt to income ratio. Your debt to income ratios is calculated by adding up all your monthly debt payments and dividing that number by your monthly gross income. Mortgage lenders want to see a ratio that’s 43% or less.
Taking on new forms of debt six months before applying for a mortgage can increase your debt to income ratio. A high debt to income ratio is a red flag to mortgage lenders because it indicates that your budget isn’t capable of taking on a new debt responsibility.
You recently changed jobs
Most lenders like to see stability. One way they check for stability is by looking at your employment history. Working for the same employer for the last two years or more can help your loan application. If you recently lost or changed jobs, it might make some lenders nervous.
If you just started a new job, you may need to ask your current employer to submit your offer letter or several pay stubs to increase your chances of qualifying for a mortgage loan.
You recently accepted money from unknown sources
Some people get the money for their down payment through sources such as their parents or other friends and relatives. The problem with this is that some lenders may see those large unknown deposits as red flags.
It’s often a good idea to have a paper trail showing where the money came from. If a relative or friend gifts you the money, then you’ll want to ask them to write a letter stating this.
In some cases, the lender has to deem the monetary gift as acceptable. In many cases, you’ll find that the Federal Housing Administration has no issues with these deposits provided you are applying for an FHA loan. This may not be the case with a conventional home loan, but you’ll want to ask your lender.
You forgot to include crucial information on your application
Your loan officer is going to go through your application with a fine-tooth comb. All the information that you might think is irrelevant, or things that you accidentally omit could mean rejection. Sometimes it’s mistakenly omitting a zero from your income. Or it could be more glaring mistakes like not mentioning that you owe the IRS some money.
It’s important to disclose all pertinent information up front, so the loan officer can help you find ways to work around whatever might be hampering your mortgage application.
If you do everything right and still get denied for a mortgage, then there are several steps you can take:
Find out why you didn’t get approved. If your application is denied, lenders have to tell you why. Ask the loan officer for their advice on what you can do to ensure that it doesn’t happen again. If you don’t understand what something means, don’t be afraid to ask questions.
Pay down debt If your debt to income ratio is too high, see what you can do about paying down debt. Once you’ve paid down more debt, you can consider reapplying again.
Find ways to earn more. In addition to your regular job, you could find other ways to earn more money. You can get a side gig or see if you can make a compelling enough case to get a raise at work.
If you give it some time and manage to fix whatever got your loan application denied, you may be able to reapply and get approved next time.
If you have done all of the above and your mortgage is still denied, then you might consider doing one of the following:
- Make a bigger down payment down payment
- Put up collateral for the loan
- Get a cosigner
If all else fails, you can try applying through a different lender. However, if you aren’t in a particular hurry, you could consider opening a savings account. You can watch your investment grow from higher than average interest rates and save up a bigger down payment more quickly.