What To Do If Your Home Loan Gets Denied
It’s hard not to be disappointed when your mortgage loan is denied.
The anticipation of moving into a new home is exciting and denial is the last hurdle you want in your way. Even if it may feel like a significant setback, there are ways you can bounce back from it and come back in a stronger position that sets you up for financial success.
Why was my mortgage denied?
The process of analyzing a loan application takes many factors into account and there are many reasons why mortgages are denied.
Debt-to-Income ratio.
Part of the loan approval process is to predict your ability to pay back the loan by analyzing your debt-to-income ratio, or DTI. Just one measure of your financial health, DTI takes all your monthly debts divided by your gross monthly income. If you have $5,000 in debt payments each month, including your mortgage loan, and your gross income is $10,000, your DTI is 50%.
Lenders are going to favor those who have lower debt-to-income ratios, and right around 43% or less is the goal to shoot for.
Credit score.
The primary reason why home loans are denied is the credit score. Not only will your credit score ascertain your ability to qualify for a mortgage, but it will also determine your interest rate.
When a buyer has a high credit score, it typically indicates that they have kept up-to-date on their credit card, loan, and other debt payments. Your credit score is a snapshot of your financial history that allows lenders to forecast your ability to make your mortgage payments.
A score of 720 and above is considered excellent, while a 640 may put you in jeopardy of qualifying for a loan. And where your score falls along the continuum will determine the interest rate on your loan. The difference between your interest payment with a 720 score versus a 680 score may not seem like much on a monthly basis, but over the term of the loan, it can add up to serious cash.
Income history.
While your income amount is already factored into your DTI, your income history is another factor altogether. Banks will typically go back about two years to look at your income stability, another predictor of your ability to make regular monthly payments.
What do I do if my mortgage was denied?
Manage your debt-to-income.
Because the variables in the DTI formula include your existing debt, your mortgage loan, and income, the only way to improve your DTI is to either decrease your existing debt, decrease the amount you would like to borrow, or increase your income.
Decrease debt.
If your DTI is telling you that you are not yet able to qualify for the mortgage you desire, perhaps you should take a break from home shopping and make a run at paying down some of your existing debt.
Make a larger down payment.
If you are unable to qualify for the full value of the loan, making a larger down payment will decrease the amount you need to borrow. It may be worth dipping into savings, temporarily going down to a bare-bones budget, or finding a second job to save for a larger down payment.
Decrease the loan amount.
As much as you may have had your heart set on a particular home, maybe now just isn’t the right time. With the help of your lender, arrive at an amount that will keep you well within your ability to pay and start shopping for homes within your newly set budget.
Increase your monthly income.
While it may sound easier than it really is if you are not in the financial position you would like to be in and would like to be in a higher earning bracket than your current position, evaluate what you need to do to earn more. Look for promotion and training opportunities to advance your career and maximize your earnings.
Build your credit score.
If your credit score was the reason for loan denial, there are things you can do to build it back up again.
- Examine your credit report to ensure accuracy.
- Make your payments on time.
- Keep your credit card balances to 30% or less of the limit.
Shop around.
Just because one lender will disqualify you for a home loan doesn’t mean that they all will. Different banks have different requirements.
If you are a first-time home buyer and don’t qualify for a conventional loan due to your credit score or the high down payment requirements, you may qualify for an FHA loan that has less strict requirements.
Consult with us.
Getting one mortgage denial may feel like a significant step back in your progress toward owning the home of your dreams but don’t let it sideline your efforts. Consider it a learning opportunity to strengthen your financial position so once you are approved, you will be in the best position possible to make your mortgage payments.
If you are considering buying a home, contact the team at Galaxy Lending Group. Our team will give you straight answers to all your questions about your credit score, DTI, income history, and help you carve the path to owning the home that is right for you. Contact us through our online form or by giving us a call.
