What to Do if Your Home Loan Application Gets Denied

The last thing you want to hear when you apply for a mortgage is that it’s been denied, but it happens. The good news is that it doesn’t mean it’s the end of the road for you. The bad news is that you have a lot of work ahead of you.

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Learn the Reason

Your first step is to find out why your loan was denied. Your lender has to tell you why you didn’t get the loan. They even have to provide you with disclosures that state the reason. For example, if your credit score prevented you from getting the mortgage, you’ll receive a letter stating which credit bureau the lender used. It will also tell you how to get a free copy of that credit report so that you can see the issues for yourself.

A few of the most common reasons mortgage applications are turned down include:

  • Bad credit
  • Not enough credit
  • Not enough income
  • Too many debts

Fix the Issue

Your next step is to take the time to fix the issue. This isn’t going to happen overnight, so don’t think of it as a quick fix. You’ll need to use the reason the lender turned you down to help you take your next steps.

For example:

  • If you had bad credit, you’ll need the time to improve it. Take a close look at your credit report and figure out what is ‘bad’ about it. Do you have late payments? Do you have too many revolving debts outstanding? Once you figure out what’s wrong, you can fix the issue, such as bringing your accounts current, paying your credit cards down, or paying a few debts off completely.
  • If you don’t have enough credit, apply for accounts you know that you will get. Retail store credit cards and secured credit cards are usually easy to get. You can also apply for a regular credit card or personal loan. Don’t open a bunch of accounts at once, though. Only open one or two accounts every few months. Then give your credit history time to ‘age’ so that you have a good credit score in the future.
  • If you don’t have enough income, you may feel stuck. It’s not like you can get a raise on demand. But, there are other ways you can increase your income. You can take on a part-time job. Just know that you’ll have to have the job for at least 12 months before a lender can consider the income. You can even start a side gig and make extra money. You may not be able to include your side gig income in your qualifying income, but it can help you in other ways, such as in paying off debt or saving for a larger down payment.
  • If you have too many debts, you know what you need to do – pay the debts down or off completely. This may take some time depending on how much debt you have. Stay consistent with your efforts and get them paid off as you can, though.

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Get Compensating Factors

It’s not a bad idea to have some compensating factors to make up for any negative aspects of your mortgage loan application. For example, if you have a lower credit score, you may want to show the lender other positive aspects of your qualifications. If you have a low credit score, but you have a large down payment, the risk isn’t as high for the lender. You are investing your own money into the home, which means you have a higher likelihood of paying your mortgage on time so you don’t lose your investment.

Other compensating factors include, high credit scores and low debt ratios. Let’s say you have a lot of debt, but you have a great credit score. The lender may not see you as risky because of your high credit score. It shows that you are financially responsible and can handle your outstanding debt.

Finally, you should shop around with different lenders. Just because one lender turned you down, it doesn’t mean that every lender will do the same. Each lender has their own requirements. Take the time to see if other lenders are willing to give you a chance. If not, take the time to improve your qualifications so that you can get the mortgage you need.

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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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