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The harshest and most hurtful word a home buyer fears hearing is that their home loan or mortgage application has been denied. It can be frustrating to have your mortgage application turned down. If you think you’re prepared to buy a new house, but lenders don’t seem to agree, you’ll want to know why you can’t get a home loan.
Having your application rejected may not be the end of your home-buying dreams. There are a few points to look at for answers as to why your application was denied. Focusing on those points can help you build a better application that lenders may not be able to refuse.
Let’s have a look at four common reasons why mortgage lenders deny applications, along with their solutions
Mortgages are one of the most complex loans, so there can be many reasons for a lender to deny an application. If your mortgage application is rejected, your first step should be to contact the lender directly and ask for the reasons for he denial. Lenders must provide consumers with why they were denied so they can work on fixing the issues for future purchases.
Here are some of the common reasons why a lender might reject a home loan application:
Many people prefer to use cash or pay with debit cards or checks. They forgo the idea of using credit cards altogether, thinking, “Why take the pressure off the debt?” These individuals do not have any credit history because they have never used a credit card or any type of credit that shows that they can handle debt and the payments that come with it.
You can still get a mortgage with no credit history by using alternative forms of payment. Fannie Mae (FNMA) states that approval can be granted if a borrower can show evidence of two to four regular payments that are not generally noted to credit bureaus, such as rent, insurance, or utility payments. However, you will not be accepted if you have no credit history. Alternatively, you can start with a credit card and build your credit history as you transition into other major forms of debt, such as a car loan. However, this strategy takes time, so allow yourself at least six months or a year to establish a credit history.
Before granting a mortgage, lenders compare your monthly income and debt, known as the debt-to-income ratio. Generally, your mortgage payments should not exceed 28% of your monthly income, and Accordingly, your DTI should not be more than 36%. Since FHA loans are more accessible, they come with slightly higher interest rates.
Depending on your minimum monthly payments, reducing your DTI can be challenging. Thus, until you can pay off a few sizable balances, reducing your credit card debt may not affect your debt-to-income ratio.
Paying down debt is the best way to go in this situation. You can consolidate multiple debts or use a 0% APR balance transfer card to help you pay off your debt. You will be able to significantly impact your credit score and thus make lenders believe you can handle major debts.
Usually, consumers are expected to have a credit score of at least 620 for a conventional mortgage. However, many people in the US do not know their credit standing. If you consistently make late payments on credit cards, especially those with large balances. Also,re, the lender will reject your loan application.
Obtaining a copy of your credit report does not cost you anything. The lender could have denied your application because of information in your credit report. If so, they should disclose this and provide you with the contact details and name of the consumer reporting agency that supplied the data in question. If you request a report copy within 60 days, you will receive free copies at no cost. Check your credit report to ensure the information is correct and updated. The reporting agency must fix mistakes on credit reports.
If the details on your credit report are accurate, the only way to fix your score is to start making payments on time again.
When you apply for more credit cards, the lenders will pull inquiries from your credit report to check your creditworthiness. Small inquiries don’t impact that much, but several in a small amount of time can harm your credit score. If you have too many queries, it negatively impacts your home-buying dreams. These inquiries about your credit can stay on your report for up to two years.
When searching for a new home, try not to apply for a new credit card and keep making good credit habits like on-time payments, paying the balances in full, keeping track of your credit, and not maxing out your credit cards.
The process of getting a home loan comes with a lot of highs and lows. You should make sure you read the rejection letter carefully, no matter the reasons for the rejection. Doing so gives you the proper understanding and knowledge of what needs to be done.
As you start to make changes, some might take just a few weeks to accomplish, but some can take years. You should make as many preparations as possible before buying a home. You shouldn’t settle for just getting approved for a mortgage; instead, you should aim for the best terms, including the lowest possible interest rate and the most affordable loan program.
It would be best if you reapplied for a mortgage once you are confident that your financial situation has improved. There is not only the perfect home for you but also the perfect mortgage that will allow you to become a homeowner at a reasonable monthly rate.
About the Author
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.