Imagine: you pour all of your energy into applying for a loan, only to find that your mortgage application is rejected.
Luckily, this frustrating hiccup can be easily avoided by working with a reputable mortgage broker. But it doesn’t hurt to go into the process with some preventative knowledge.
Read on to learn about common reasons for mortgage application rejection and how you can avoid it.
Common Reasons for Rejection
Poor Credit History
Lenders like to see that applicants have a well-established, longstanding credit history. Higher credit scores boost lenders’ confidence by proving that you have experience paying back loans in a timely and responsible manner. Therefore, it’s important to snag a copy of your credit report before applying for any loans. Doing so will help you to assess the factors that may be keeping your score low and begin improving it. The federal government has a lot of resources to help consumers understand credit reports and how to improve their scores. Visit this page on usa.gov for more information: https://www.usa.gov/credit-reports.
High Debt-to-Income Ratio
Most lenders use a debt-to-income ratio to calculate how your monthly income stacks up against how much you spend on debt repayment. This could include things like student loan debt. As you may have guessed, lenders like to see that your amount of debt repayment is substantially lower than your income. Generally, they look for a debt-to-income ratio of 43%. Your application may be rejected if it seems like you can’t afford taking on any new debt. It’s good practice to actively pay down your other debts so that you look more attractive to lenders.
You’ve Applied for New Lines of Credit Recently
Applying for multiple new lines of credit within six months or so before seeking out a mortgage can make lenders nervous. This is for a couple of reasons. For one thing, it gives off the impression that your financial situation may have changed, i.e. your monthly income has decreased, so you need a new credit card to supplement it. Secondly, it makes your debt-to-income ratio higher.
How You Can Avoid Rejection
The good news is that one rejection isn’t a death sentence. There are plenty of loans out there, and your mortgage broker can help hand pick ones that you’re more likely to get approved for.
In the long-term, the key to raising your chances of approval mainly boils down to two factors: education and stability. For starters, it’s important to remain educated on your current financial situation by staying on top of your credit score and monthly expenses. You should regularly monitor your credit report for errors and maintain awareness of how your debts compare to your monthly income. In tandem with that, demonstrate financial stability by making payments on time and actively paying down debt.
If long-term strategies don’t work and your applications are still getting denied, there are also a couple of steps you can take in the short-term. Try making a bigger down payment or getting a co-signer. But, again, rejection isn’t a death sentence. There are a multitude of loans out there to suit a variety of borrowers. Keep an open line of communication with your mortgage broker and be aware of all of your options.
The takeaway: It can sting if your mortgage application is rejected by lenders, but you can avoid it by taking preventative measures. As a first step, educate yourself on factors that can lead to rejection. Then, take precautionary measures to boost your chances of approval. Most importantly, don’t get discouraged. For every application that gets rejected, there is another loan out there that better suits you.
Disclaimer: These articles are intended for general informational purposes only and do not substitute the advice of qualified mortgage professionals. Please always consult your mortgage broker or loan officer when it comes to making decisions.