Sure, the results of an appraisal and the home inspection can stop a real estate deal dead in its tracks, but what if you never get that far in the process? If your mortgage application was denied it can feel like someone let all the air out of your tires.
What if the lender turns down your loan application – is there anything you can do to buy a home?
That depends on why the lender denied your application, and there are several possible reasons.
Let’s take a look at them and see if we can’t get you back on track to buying a home.
Low or insufficient credit score
Pulling your credit report will be one of the lender’s first tasks and low or spotty credit records are the most common reason that someone is denied a mortgage.
If you applied for a conventional loan and were turned down for this reason, consider applying for a loan using an FHA-backed mortgage.
The score requirements are a lot more relaxed and lenders are more likely to take a chance on you when the government is promising to repay them should you default on the loan.
Another way to approach the credit score problem is by paying a larger down payment, if you can afford it. Lenders take large down payments quite seriously and are willing to overlook other problems with the application when the borrower has some “skin” in the game.
Plus, the larger down payment will bring down the amount you need to borrow.
If none of these alternatives work, take a break from house hunting while you work on your credit score.
The experts at Fair, Isaac and Company, or FICO as they are known, remind consumers that “repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score.”
Get current on any bills you’re behind on and pay all bills on time going forward. Reduce your debt as much as possible and keep the balances low on your credit cards.
Lower your ratios
One of the aspects of your finances that the lender’s underwriter scrutinizes is your debt-to-income ratio (DTI). If they turned you down because yours is too high, get to work lowering it. There are three ways to do this:
- Increase your income
- Lower your debt
- Do a combination of both
Unacceptable employment history
The days of the so-called “liar loans” are long gone and today, lenders look for at least two years of consistent job history, either with the same employer or in the same industry. Even the self-employed applicant will need to meet this two-year benchmark.
If your loan denial is the result of unacceptable work history, consider waiting until you have the required amount of time on the job before reapplying.
Otherwise, keep shopping around for a loan but chances are, most lenders will deny your application for this reason.
Last minute denial
Just when the purchase seems to have overcome the most common obstacles and you’re mentally moving in to the home, the lender sends you a message that your loan has been denied.
How can this happen?
Two reasons come to mind: the appraiser said the home isn’t worth the amount of money you want to borrow or your financial situation has changed since you first applied for the loan.
Lenders will perform one last pull of your credit information just before closing, so it’s important that your financial situation remains consistent from the time escrow opens until it closes.
Don’t make major purchases on credit, don’t apply for new credit, don’t switch jobs or banks
I am not a mortgage professionals but are happy to refer you to one should you have any questions about getting a loan, or about the mortgage process in general.
