You applied for a mortgage and did not get the approval you thought you would get. What happens to your credit? Will other lenders know you weren’t approved? The good news is no one will know what happened. They will know that you applied for a mortgage, but that is the extent of it. There is no section on your credit report that shows loans that you applied for and didn’t get, whether because you were declined or you decided not to take it. If you weren’t approved, it does not hurt your credit. Rather than hiding in the corner and crying about your shattered dreams, find out what you need to fix and get out there and apply again.
Mortgage Denial may Hurt your Credit
The one place a mortgage denial may hurt your credit is the credit inquiry. Every time you apply for a loan, the lender pulls your credit. This is the case for all:
- Credit Cards
- Student Loans
- Car Loans
- Personal Loans
When the lender pulls your credit, the credit bureau creates a record for an inquiry. This means someone pulled your credit because you applied for some type of loan. This serves as a red flag to other lenders because it shows that you may or may not have recently taken out new credit. Other people who look at your credit report can likely tell what type of loan you applied for based on the lender pulling your credit. For example, a credit inquiry from Capital One is likely a credit card application. Other inquires, such as those from large, commercial banks might not be as obvious since they offer so many different loan products.
The inquiry does not hurt your credit directly. You may lose around 5 points for an inquiry. Generally, 5 points doesn’t do much to anyone’s chances of a loan approval. However, banks do look at the number of inquiries you have in a given period. Let’s say within a 3 week period you have 6 inquiries. This could look suspicious to a mortgage lender. While the inquiries themselves may or may not harm your credit, the fact that the inquiries are there could be a problem.
Shop Close Together
The question comes to mind, then, what do people do who want to rate shop? Or what if you want to apply with several lenders to see which programs you qualify for when buying a home? If an inquiry knocks around 5 points off your score, several inquiries could really hurt your credit. Luckily, credit bureaus take control in this situation. If they see you have inquiries for 4 different banks within a short time period, each of which the credit bureaus know offers the same type of loan, they will lump them together into one inquiry. This means you are hit for one inquiry rather than 4. This only pertains to those who apply for the loans in a short amount of time, though. If you apply for one mortgage today and another one month from now, the inquiries will be separate.
Picking up the Pieces
Once you receive a mortgage denial, what are you supposed to do? Are your dreams for owning a home shattered? The outcome depends on your actions. You can give up and stick with renting for the long-term if that’s what you want to do. Or you can pick up the pieces, take the lender’s advice and fix the problems with your credit.
The lender has access to your credit report. He may even share it with you. On this hard report, he can show you the late payments reporting, the high balances you have, or the collections/judgments showing up in your name. Ask him questions regarding which items hurt your credit the most and which you should focus on. Generally, all lenders require collections and/or judgments to be paid off before closing on a loan, so this is usually high priority. Other areas include late payments and high balances. Everyone should work on making their payments on time, but high balances could hurt your score as well. If you are overextended on your available credit, try to pay your balances down as much as you can. 20% is a good number to target, meaning you should only have 20% of your available credit outstanding at one time.
Reapply for a Mortgage
Once you fix your credit score, it is time to reapply for a mortgage. Make sure you took the lender’s advice seriously and did what you could to increase your credit score. Make sure you give it time for your score to increase, too. It doesn’t happen overnight. For example, if you had late payments that you brought current, you need some time to pass for your score to increase. Just bringing the payments current isn’t enough – you have to show that you can continue to make your payments on time moving forward.
The lender will look at your score and your credit history. They will see your timely payments and the fact that you paid down your high balances. This can all work to your favor. However, you have to give it time. The lender might not want to jump up right away and give you a loan one month after bringing your accounts current. He may want to see 12 months of timely payments to ensure that you are on the right path.
Regardless of what happens with your mortgage application, know that you don’t hurt your credit by trying. If you listened to what the lender said previously, you probably stand a good chance at securing a loan approval. If you aren’t approved for a conforming loan, remember you can always try an FHA loan or even subprime loans to find the program that works best for your financial situation. Every bank offers different programs with different costs and rates – shop around to find the best one for you!