When Philip Weiss, a systems engineer in New Jersey, saw the rustic house on a four-acre lot in the Poconos, it was love at first sight. He was preapproved for a mortgage, placed an offer on the home and the seller accepted.
Nearly one month later, the unexpected happened. Weiss says despite having a 700+ credit score, a low debt-to-income ratio and stable income, two past delinquencies on his credit report came back to haunt him, even though the accounts were paid in full. He was denied the mortgage loan.
Getting approved for a mortgage isn’t easy. About 460,000 home purchase mortgage applications for single-family homes — 8% of them — were denied in 2019, according to data submitted under the Home Mortgage Disclosure Act (HMDA).
If you’ve been denied, don’t despair: Getting turned down for a mortgage doesn’t have to be the end of your homeownership dreams. It’s possible to recover from a mortgage denial by taking these steps.
Find out why you were denied
The Equal Credit Opportunity Act says your lender has 60 days to give you a specific reason why your loan application was not accepted. Some of the most common reasons a mortgage application is denied, according to HMDA data, are:
High debt-to-income ratio.
Insufficient down payment.
As Weiss learned, a preapproval doesn’t guarantee your mortgage will close. In some cases, you might be denied when the loan enters underwriting and the lender examines your financial profile more closely.
Understanding the reason or reasons behind the rejection can help you figure out what to do next, says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling.
Reason for denial: Credit history
Next step: Scour your reports
If you were denied a mortgage because of information in your credit report, you are entitled to a free copy so you can verify the report is correct. Until April 2021, consumers can get a free copy of their credit report every week from the three major credit bureaus at AnnualCreditReport.com.
Dispute any errors or outdated information by contacting the credit reporting agency online, or by writing a letter and sending it via certified mail. Submit copies of any supporting documentation to strengthen your case.
If the negative information on your report is correct, only time will get rid of it. Most negative items will stay on a credit report for up to seven years, including late payments, repossessions or a Chapter 13 bankruptcy.
If you were denied a mortgage because you lack a sufficient credit history, take steps to build your credit profile. Getting a secured credit card or having your on-time rent and utility bill payments reported to the credit bureaus are two options.
Reason for denial: Low credit score
Next step: Build it up
Some lenders have adopted stricter credit score requirements during the coronavirus pandemic, making it tougher to get a mortgage. But with some time and patience, there are ways to help your credit score.
Manage your credit responsibly by paying all of your bills on time, making more than the minimum payment or several small payments throughout the month.
Keep your existing credit card balances low, as well as the percentage of available credit you use.
Avoid applying for any new lines of credit, applying for multiple credit accounts at the same time or closing any unused cards.
Reason for denial: High debt-to-income ratio
Next step: Make a plan to reduce it
Lenders use your debt-to-income ratio, or DTI, to evaluate your ability to repay the loan. Your DTI is all of your monthly debt payments divided by your gross monthly income. The lower the DTI, the better. A good DTI to get approved for a mortgage is 36% or less.
If your DTI is high, lowering it before reapplying for a mortgage will raise your chances of getting approved. You can reduce your DTI by increasing your income, avoiding new debt or paying down your credit cards and loans.
Reason for denial: Insufficient down payment
Next step: Save more or seek assistance
Saving for a down payment can be tough, even if you’re only putting down 3%, the minimum requirement for a conventional loan.
Before reapplying for a mortgage, make saving a priority: You could automate transfers to your savings account every time you get paid, or sock away a windfall like a tax return to make progress toward your goal even faster.
First-time home buyers may also be able to take advantage of state and local down payment assistance programs that provide funds as a grant or loan. Some programs may have income or credit score requirements to qualify.
Consider reapplying with another lender
Underwriting standards and guidelines vary by lender. McClary says it makes sense to shop multiple lenders to increase your chances of getting approved. He says you can limit the impact to your credit score by applying with several lenders within a 30- to 45-day period.
Weiss was discouraged when his application for a conventional mortgage was denied, but he was not deterred. He applied with another lender and discovered he could qualify for a loan backed by the Federal Housing Administration. Going through another mortgage application process was cumbersome, but Weiss says it was worth it.
He closed on his dream home in early November 2020 and is thrilled to finally be a homeowner.
“It’s a little daunting having a mortgage, but I’m truly excited,” Weiss says.