Once you’ve done the often grueling work of submitting your mortgage application, you’re either approved or declined. While the latter can be a huge disappointment, and sometimes even a surprising one at that, it’s important to keep perspective: this is not the end of your road to home ownership!
That said, before you begin the process all over again, understanding the reasons you were denied in the first place can go a very long way toward ensuring a different result the second time around.
Why were you denied a mortgage loan?
Being overextended on your current loans or having an account (or three) in collections can certainly be the reason for your denial, as can bad credit or past bankruptcy—but the reasons aren’t always this straightforward. For instance, getting a new credit card, applying for a loan, or taking on new debt within six months of applying for a mortgage can lessen your chances of approval because new debt can increase your DTI (debt-to-income ratio), and most lenders are looking for a DTI lower than 43%. Additionally, if you recently lost your job or transitioned to a new one, this could make some lenders hesitant, since they want to see you’re stable and have been in the same job for at least two years. Acquiring funds for your down payment via unknown deposits from family or friends can also appear as red flags to would-be lenders.
What to do if your mortgage is declined
As long as you know what steps to follow, you can chalk your mortgage denial up to a learning experience.
Understand the reasons. While it’s easy (or not) to guess why you might have been declined, the only way to know for sure is to ask. Most lenders or brokers will be forthright, and they may even be legally required to. Discuss your application, and don’t hesitate to ask for advice. There are no stupid questions except those left unasked.
Boost your credit score. Improving your credit score isn’t always simple or quick, but it’s an important step toward convincing potential lenders that you can be trusted. Get a free credit report and consult it regularly. If you find errors within the report, be sure to file a dispute with the credit bureau. Then, focus on building up credit. A secured credit card can be a safer way to build credit without losing control of spending.
Increase your income. Although this is no easy feat, sit down and brainstorm additional ways to earn money on top of your usual income—such as a creative ‘side hustle,’ asking for a promotion at your work, or taking on odd jobs.
Grow your down payment. Offering a larger down payment means requesting a smaller mortgage and therefore presenting less of a risk to the lender. If your finances won’t allow for this, you may want to focus on saving up more money within a given timeframe.
Once you’re ready to reapply for a mortgage, consider using a mortgage broker to work the market for you. Not only can they negotiate on your behalf with a wide range of banks and lenders, but they can also offer very useful advice along the way. You got this!