Are you a first time home buyer? Or maybe you’re transferring jobs and you need to sell your old house and purchase a new one? No matter which of these two categories you fall under, the number one thing that you need to determine is how to finance your purchase.
A house is one of the biggest things that you will invest on in a lifetime, so it’s a huge financial responsibility. By determining how you will finance the purchase, you can handle your funds better before, during and after the home buying process.
A Quick Look at the Mortgage Application Process
As you may already know, a mortgage loan is what you need to apply for if you wish to get financing for a house. Unless you’re a million dollar-earning Hollywood celebrity or athlete who can afford to purchase a house with a one-off payment, you would need financing from a lender. This is where mortgage loans come in.
According to Investopedia.com, mortgage is a “debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.” For regular earning individuals, applying for a mortgage loan is a must because they do not have the means to pay the entire value of the purchase up front.
Depending on the terms of the mortgage loan, the borrower will make a payment including the interest, until the property is owned free and clear. There’s a possibility for banks to foreclose a property in case payments stop; and there’s also a possibility for a mortgage loan application to be denied. Find out why in the next section.
Why Do Mortgage Applications Get Denied?
Before counting down the reasons why mortgage applications get denied, let’s first take a quick look at the steps involved in mortgage processing:
- First, a borrower who would like to buy a house applies for a mortgage loan.
- Second, there is a pre-approval stage which will assess your credit score, your financial documents and other factors to prove that you are indeed capable of paying off the loan.
- Third, there’s the appraisal stage. After the pre-approval, an appraiser will determine the real market value of the house. It’s at this point that the loan can be denied, especially if it turns out that the appraised value of the house is lower than the selling price.
- Fourth is the approval stage which occurs after all the data has been verified.
So how can your mortgage application get denied? Some of the most common reasons include:
- Poor credit history;
- If the borrower is not registered to vote;
- Too many credit applications;
- Having too much debt;
- Having too many payday loans;
- Administration errors;
- Not earning enough to afford the mortgage;
- Inability to pay off the required deposit;
- Not matching the buyer profile that the lender requires.
What to Do When Your Mortgage Is Denied
Take a look at the things that you need to do once your mortgage loan application gets denied:
1. Determine why the loan was denied in the first place
If your mortgage loan application does get denied, you should know the reason behind the disapproval so that you can do something about it, and up your chances to own a home the next time you apply for another loan.
Here are some of the things to do based on the reason why your mortgage was denied.
- If you have low credit score: Prior to your mortgage loan application, you should have already reviewed your credit reports and determined if there were inconsistencies. If your mortgage loan application was denied, look closely at your FICO score. Get copies of your free credit reports and call the agency about any errors that should be corrected. Equifax, TransUnion and Experian are the three credit bureaus which give out free credit reports annually. If you were unable to find any errors, spend the next year or two building a solid credit history so that your next loan application will not get denied for the same reason.
- If you lost your job: Naturally, from a lender’s perspective, a borrower will only be able to pay off a loan if he or she holds down a steady job. Usually, lenders approve applications from borrowers who have held down a steady job for the past two years.
- If you do not have sufficient income: If low income is the reason behind the rejection of your mortgage loan application, ask if you can make a larger down payment. Another option would be to bring in a co-signer who has a solid credit history. In the first place, you should have considered your income before choosing which property to buy. Remember that the loan payment will not be your only monthly expense – you still need to deduct your living expenses. To make quick calculations, go online and look for mortgage loan calculators. Depending on your monthly income, you can determine how much monthly mortgage payment you can actually afford.
- If you were unable to provide consistent information: Different income declarations from the borrower and the employer might also lead to the disapproval of a home loan. The best solution for this is to make sure that everything is in proper order before actually submitting your loan application to a lender.
- If your home appraisal is low: Finally, there are times when the appraiser will conclude that the home you are planning to buy is not worth the amount you are borrowing. If this is the case, the loan will most likely be denied. It is best to simply accept the lender’s decision and move on. The next time, use a low appraisal to negotiate a lower sales price.
2. Fix the problem
If it takes a very short time for you to fix the problem behind the denial of the loan, the lender can easily approve your loan. However, for instances like low credit score, you might need a year or two to build a solid credit history before reapplying. If it’s a simple case of low down payment, all you have to do to fix the problem is find out the amount that they require.
If you can produce such amount, your loan should get approved ASAP. It also helps to determine what the qualifying guidelines are for a mortgage loan, which differs from lender to lender. Finding out if you fit the requirements prior to your loan application the next time would help a lot.
3. Apply with other lenders
Not all lenders will deny your loan application. This is especially true if the reason for denial is minor, like inconsistent information. If Lender A denied your mortgage loan application, apply with Lender B. Go online and look for the available lenders in your area. It’s perfectly fine to send in your applications with several lenders, in case there’s a delay in the processing period.
In case one lender denies your application, you have a few more options to look forward to. However, when using an online lender, make sure that the company is legitimate. If more than one lender approves your loan at almost the same time, make a comparison of the terms and conditions – then choose one that is more favorable for you as a borrower.
4. Consider government programs
In case your mortgage loan application is denied, there are several mortgage relief programs from the federal government that you can take advantage of. Some assistance options include:
- Mortgage Forgiveness Debt Relief Act Extension
- Home Affordable Modification Program
- Home Affordable Refinance Program
- Home Affordable Foreclosure Alternatives Program
- Home Affordable Unemployment Program
There are eligibility requirements that you have to meet to qualify for these programs. In case your loan gets denied or if you would like to make your current loan more affordable, these are the options that you can choose from if you qualify.
5. Reduce your debt
One of the most common reasons why mortgage loan applications are denied is the borrower having a bulk of debt. This is somewhat related to your credit history or credit score, which will naturally be low if the details are compromised by excessive debt.
If you’re still paying off your car loans, school loans, credit card debts, payday loans and similar debts, your chances of being approved will be very slim. The best solution for this is to wait until almost all your loans have all been paid off, and then apply for a mortgage loan.
Getting a denial for your mortgage loan application should not put an end to your vision of owning your dream house. Once you receive the news, take it all in stride and know what you can do to increase your chances of getting approved for a home loan the next time.
By reducing your debt, building your credit, looking for another lender and determining what your other options are, you should get that mortgage loan approval in due time.