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If your mortgage application is declined, your plans to buy a home could be thrown off course. Hopefully, it will only be a minor setback and you can quickly resolve the issue and close on the home. But if that doesn't work, you may need to look for a different type of mortgage, find a new lender or improve your creditworthiness before trying again. Here's what to know about why your mortgage may have been denied and what steps you can take next.
Common Reasons Your Mortgage Could Be Denied
Mortgages are one of the largest and most complex consumer loans, and there are many reasons a lender might deny your application. Some common reasons include:
- Your debt-to-income ratio is too high. Mortgage lenders compare your monthly debt payments and income to determine your debt-to-income ratio (DTI). Your DTI ratios before you receive the mortgage (front-end DTI) and with the mortgage (back-end DTI) are both important, and a high DTI could be keeping you from getting approved.
- Your income isn't stable. You may also have trouble if you recently changed jobs, especially if you moved into a new career or the new job is commission-based.
- You need a larger down payment. While some mortgages only require a 3.5% or 5% down payment (and VA loans don't require any down payment), a larger down payment might increase your chances of getting approved or be required for certain types of mortgages.
- Your credit scores are too low. Mortgage lenders often look at a merged credit report with information from all three major credit bureaus—Experian, TransUnion and Equifax. They may use specific FICO® Score☉ models based on each report and have minimum score requirements.
- You have negative marks in your credit history. Credit scores aside, a lender may deny your application if you have past-due accounts, collection accounts, a recent foreclosure or a bankruptcy in your credit history.
5 Steps to Take After Your Mortgage Is Declined
If your application is denied, your next steps may depend on the reason for the denial. First find out exactly why the loan was declined, then determine which action would be best for your situation.
1. Contact Your Loan Officer or Broker
The lender will send you an adverse action letter with reasons the application was denied, but these aren't always simple to understand. Reach out to your loan officer or broker, who should be able to explain the details of your letter.
In some cases, the denial could be due to an easily addressable issue, such as a typo, missing form or request for additional information. Quickly clearing these up could save the deal. If there's a larger issue, your loan officer or broker may be able to explain your options.
2. Ask About Other Types of Mortgages
If the denial was based on your financial or credit information, you can ask about different types of mortgages that may better suit your situation. Your lender may even suggest other programs for you based on your application and the reason for denial. For example, if you applied for a conventional loan and were denied, perhaps you could get approved for a government-backed FHA loan instead.
Loan officers may work for a specific bank, credit union or lender. If your loan officer isn't able to help, you might want to branch out to other lenders that offer other types of mortgages or have different requirements. Or, a loan broker may be able to shop around on your behalf.
3. Reduce Your DTI
You might be denied if the lender decides your DTI is too high—in other words, your monthly debt payments are too large a percentage of your income. The maximum limit can depend on the lender, type of loan and other factors (such as your credit score), but there may be a maximum back-end DTI of 43%. A DTI of 36% or lower could be a good target if you want to increase your chances of getting a mortgage.
Lowering your DTI can be difficult because it depends on your minimum monthly payments. So, paying down your credit card balances might not have a big impact on your DTI unless you can pay off a couple large balances.
But completely paying off a loan or consolidating debt to lower your monthly minimum payments might help. Increasing your income, either by negotiating a raise or finding a higher-paying job, could also quickly improve your DTI.
4. Improve Your Credit
Lenders' minimum credit score requirements can vary from from 500 to 700, which is one reason looking at other lenders and types of loans are good first steps when your mortgage application is declined.
Getting your credit ready to buy a home can take time and you may need to pay off or settle past-due accounts and wait for the impact of recent negative marks to diminish. You can also take steps to improve your credit, such as making all your debt payments on time and paying down credit card balances to reduce the percentage of available credit you're using (your utilization ratio).
If you don't have any credit accounts, opening a secured credit card or credit-builder loan might be helpful. However, new credit accounts can make qualifying for a mortgage more difficult, and the payments may increase your DTI.
Becoming an authorized user on someone else's credit card account and getting the benefit of their credit history might also help your credit scores. But sometimes, mortgage lenders won't include these accounts when determining your eligibility for a loan.
5. Save for a Larger Down Payment or Consider a Less Expensive Home
You could also retry with a smaller loan, either by increasing your down payment or finding a less expensive home to buy. Both options can take time, and neither is ideal if you had your heart set on the home you already found.
Look into a down payment assistance program to see if you can get help. If a relative offers to gift you money, speak with your loan officer or broker about the best approach. Lenders might see a large deposit in one of your accounts as a red flag if they think you need to repay the money.
Check Your Credit Before Applying
Your credit scores can have a direct impact on whether you qualify for a mortgage and the rates you receive. You can check your Experian credit report and a FICO® Score for free from Experian. The free score could help you estimate where you're at and monitor your progress if you're working to improve your credit. The Experian credit tools also give you personalized insights into what's impacting your credit score the most.