Applying for a conventional loan is the most common way to apply for a mortgage. Borrowers want the low credit scores and good terms that conventional loans have to offer. Unfortunately, many people get turned down for these loans. The good news is that even if you do get turned down, there are simple steps you can take to turn your denial into an approval down the road.
Fix your Credit
The number one thing you need to do is fix your credit. If you are able to find out from the lender itself the reason you were turned down, you can fix the problem right away. If you are not sure the exact problem, request a copy of your credit report and evaluate it yourself. Look for any delinquent accounts; accounts with large outstanding balances compared to the available balance; and any collections that are reporting. One by one, go through each account and either bring them current or pay them down. In general, you do not want more than 30 percent of the available credit on any account outstanding. If you are close to your limits on many accounts, this could be the reason you were denied. Because this process will not be fixed overnight, you should put together a solid strategy that will help you pay your accounts down in a timely manner.
Talk to the Credit Bureaus
When you obtain a copy of your credit report, evaluate it for accuracy in reporting. If you have proof that an account is not reporting correctly, you should take the steps to get it corrected. This could be a lengthy process as you have to request that the bureau change the inaccuracy, provide the evidence, and wait for them to validate it. Once the allotted time period has passed, follow up with the credit bureau to ensure that the account is now reporting correctly.
Lower your Price Range
If the lender tells you that your denial is not based on your credit report, but rather your debt-to-income ratio, you have two ways to fix it: you can pay off some accounts with high monthly payments or lower the price range in which you look for a home. Because paying accounts off can take a long time, a better option might be to lower the cost of the home you purchase. If the debt ratio is rather high, negotiating a lower price for the purchase of the home is not very likely, leaving you the other option of purchasing a home for a lower price. While this might not be what you wanted in the first place, it could benefit you all around because you will have a lower payment, which means you will pay the loan off faster and have an easier time affording the loan.
Straighten out your Income
If you are not on a salary, your qualifying income might be different than you anticipated. Self-employment income and commission that are reported on your tax returns along with certain expenses can make your income look lower to a mortgage company. Even though you make more than you show on paper, the lender can only take what you reported on your tax returns, which could result in a debt ratio that is too high, causing your loan to be turned down. If this happens to you, consider how you file your taxes the following year. Sometimes writing off fewer expenses makes you have a higher tax liability, but increases your qualifying income on your mortgage application, enabling you to get approved for the loan you wanted in the first place.
Picking up the pieces after a loan denial is not easy, but it can be done. Take what the lender says to heart and set out to make the necessary changes to make your loan file more attractive. The changes you make will benefit you financially now as well as in the future. If you are diligent about making changes, it might only take a few months to get the loan approval that you desire. Keep in mind, however, that every lender has different requirements; if one lender turns you down, try applying with another lender to see if you get the same response.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.