Being denied a mortgage from your lender can be discouraging. However, don’t give up on your dream of owning a home or refinancing. Instead, empower yourself with knowledge and take strategic steps to turn this situation around. In this comprehensive guide, we’ll walk you through the steps you can take to overcome mortgage application denials and pave the way towards achieving your homeownership dreams.

Common Reasons for Mortgage Application Denials

Familiarizing yourself with the potential stumbling blocks could help you proactively address issues that might lead to a mortgage application denial. Here are the key factors to watch out for:

  • Credit Issues: Lenders assess your credit score for financial responsibility. A low score or negative marks can often be the reason for mortgage denial. Limited credit history may also result in rejection.
  • Employment Changes: Lenders prefer stable employment. Recent job switches or a history of frequent changes could raise red flags.
  • High Debt-to-Income Ratio: Excessive monthly debt compared to monthly income can signal repayment concerns, prompting lenders to deny the mortgage.
  • Sudden Large Deposits: While cash reserves are favorable, unexplained large deposits might trigger reluctance due to uncertainty about the source. In some cases, an explanation and further documentation may assist in approval.
  • Incomplete Application Details: Even with favorable credit and a stable income, an incomplete mortgage application might lead to rejection. If you have questions when completing your mortgage application, then simply ask your Loan Officer.

What to do if you are denied a mortgage?

If your mortgage application is denied, then don’t lose hope! It’s just a temporary setback. The positive side is that there are several steps you can take to improve your chances of getting approved in your next application.

  • Contact Your Loan Officer for Clarity: Reach out to your loan officer to gain insights into the denial. A well-informed loan officer should have already communicated potential concerns during the application process. Understanding the reasons behind the rejection is crucial for your next steps.
  • Prepare for Alternative Options: Inquire about alternative mortgage programs that might be more suitable for your financial situation. Discuss options like FHA loans or USDA loans with your loan officer.
  • Review Your Credit Profile: Thoroughly examine your credit report to identify any inaccuracies that could negatively impact your score. Addressing these errors can help enhance your credit standing.

Strategies to Strengthen Your Mortgage Application

Whether facing a mortgage denial or seeking a larger approval, there are some specific actions that could strengthen your mortgage application. Here are some strategies to consider:

  • Reduce Current Debt: Lenders often evaluate your debt-to-income ratio, which compares your monthly debt payments to your income. Lowering your debt load demonstrates financial responsibility and enhances your borrowing capacity.
  • Establish an Emergency Fund: Display readiness for homeownership responsibilities with an emergency fund. Lenders gain confidence in your ability to manage a mortgage by showcasing preparedness for unforeseen expenses.
  • Understand Your Budget: A clear understanding of your budget not only helps you determine how much you can comfortably afford but also assures lenders that you’ve thoroughly evaluated your financial situation. It showcases your commitment to managing your finances responsibly.
  • Improve Your Credit Score: Enhance your credit score by prioritizing debt reduction, timely payments, and minimizing new debt.

FAQs About Mortgage Denials

Can you reapply for a mortgage if denied?

If your application was denied, then you don’t have to wait, but addressing the issues before reapplying is crucial to avoid another rejection and potential harm to your credit score. The waiting period varies based on the denial reason. Analyze the cause for denial such as high debt, low credit score, short employment history, etc. and take corrective measures. Discussing your situation with your loan officer before reapplying so you know which steps to take could help reduce the chance of being denied again.

What are the chances of getting denied after pre approval?

According to the latest data, from the Consumer Financial Protection Bureau*, the denial rate for home purchase applications was 8.3% in 2021. In contrast, refinance application denials reached 14.2%. Keep in mind that these percentages can vary due to economic changes, shifts in lending standards, and external influences.

*Source: https://files.consumerfinance.gov/f/documents/cfpb_data-point-mortgage-market-activity-trends_report_2022-09.pdf 

What looks bad when getting a mortgage?

Avoid these mistakes when applying for a mortgage. The following could cause mortgage denial.

  • Moving Money Between Banks: Don’t shift money between banks while applying for a mortgage. You’ll want to leave accounts as they are, as lenders must verify each one. Consider consolidation at a later time, if needed.
  • Job Changes: Changing jobs can cause uncertainty due to employment probation periods. Additionally, keep in mind that timing matters – your new job’s income might not be considered immediately, so plan job transitions carefully.
  • Big Purchases: Hold off on large purchases until after securing your mortgage. We can’t stress this enough! Making purchases like this when you’re in the home buying process can increase your debt, which could affect your loan qualification or cash on hand for closing funds.
  • New Credit Accounts: Opening new credit accounts (like cards or loans) raises lender concerns. First, opening new credit accounts could reduce your credit score, and secondly, if you use the new credit lines to make purchases, then your debt-to-income ratio may grow. These factors could affect your loan qualification.
  • Late Payments: Consistent late or missed bill payments can show financial instability. Maintain a clean payment history to show responsible financial behavior.
  • Co-signing: Co-signing others’ loans means shared responsibility. Acquiring this responsibility affects your debt-to-income ratio, which will affect your mortgage eligibility, even as a secondary borrower.
  • Large Deposits: Sudden, sizeable deposits without explanation raise questions. Lenders need a clear understanding of your financial history, so be prepared to document unusual deposits.

How long do you have to wait to get a mortgage after it is denied?

There’s no fixed timeframe following a mortgage denial. Nevertheless, it’s advisable to consider a brief waiting period. This is because mortgage applications often entail a credit check, which has the potential to slightly decrease your credit score. Allowing some time to elapse can assist in allowing your credit score to stabilize.

Connect With A Mortgage Lender Near You