Purchasing a home to call your own is one of the most exciting parts of becoming an adult. But buying a home comes with a few restrictions. The bank wants to make sure you have the means to repay your mortgage before you sign on the dotted line. Still, it's natural to feel frustrated if your lender denies your application for a loan.
Thankfully, just because your initial application has been denied, that doesn't mean you have to let go of your dreams of owning your own home. With careful action, you may be able to make homeownership a reality.
Top reasons borrowers are denied for mortgage loans
The best way to avoid the heartbreak from losing out on a home is to make sure you have everything in line before you apply. Knowing what lenders look for and why applications are commonly denied can help eliminate a lot of frustration. There are many reasons why applications aren’t approved, and some of them come with an easy fix. Things that may have happened include:
- You had a recent job change. Your ability to pay back your loan is the most important thing a lender looks at. While there are no guarantees that you'll have your job from one day to the next, your lender can make a decision based on your previous work history. In most cases, the bank will consider how long you’ve been in your current position. Some lenders may also request information on your previous employers if you have changed jobs within the past two years.
- Poor debt-to-income ratio. Lenders review your debt-to-income ratio to see how much you earn compared to how much you owe. If you’re paying a lot out on a monthly basis, it's going to make it hard for your lender to trust you have the ability to make your monthly payment.
- You recently applied for or obtained new credit. It's always smart to refrain from making any big purchases or opening new credit after you apply for a mortgage. The same holds true for your activity in the months before you apply. Applying for credit cards or a new line of credit can affect your credit worthiness and may negatively impact your credit score and chances of getting a loan.
- Your bank records include an unexplained deposit. Lenders need to be able to determine the source of the funds you will use for the mortgage down payment, closing costs and reserves. Large, unexplained deposits could indicate the use of ineligible assets such as an unsecured loan. However, maybe you took out a withdrawal from a 401k or received a bonus? Large unexpected deposits are a red flag to lenders. Make sure to tell your lender about any unusual deposits, and have the paperwork to back it up.
What to do after your application is denied
All is not lost if your application is denied. It just means you're going to have to wait a little longer. The good news is there are plenty of things you can do to increase your odds of being approved the next time you apply.
- Call the lender. The most important thing you should do after your application has been denied is call the lender. They are legally required to tell you why you weren't approved. In some cases, your lender just needs a little clarification or some extra paperwork.
- Review your credit. If your application was denied because of your credit rating, it's important to take action now. Even if you were denied for a different reason, improving your score can help you get better mortgage terms. Improving your credit score can take a long time, so you don't want to wait. Examine your report for any errors. If there are any mistakes, submit a dispute through all three credit reporting agencies. If you have high balances, look for extra funds to pay them down. If you have some late payments, make sure you pay on time going forward. Remember, now is not a good time to open new credit, so avoid balance transfer offers or personal loans.
- Wait. Sometimes you just have to wait. There are instances where timing may be an issue, such as the length of time on your current job or a recent bankruptcy. In this case, your lender can give you a timeframe for when you can reapply. In the meantime, it doesn't hurt to continue working on your credit and saving for a bigger down payment.
You may want to consider reaching out to another lender that offers other mortgage types. Be sure to consider the cost of reapplying.
How long should you wait before you reapply for a loan?
While there is no legal time limit for how long you have to wait to reapply for a loan, some lenders may suggest or even require you to wait a set amount of time. That said, you'll want to look at your specific circumstances to choose the best time to submit a new application. Things you should consider include:
- The length of time at your job. If you were denied for your employment history, you want to wait until you have a solid job history before you reapply. Otherwise, you're setting yourself up for another rejection. In most cases, it's a good idea to have at least two years in your current position. However, your lender may have different requirements. Make sure you verify this information before you submit your application.
- Your credit score. It typically takes a minimum of 30 days before any changes will process on your credit report. In some cases, it can take 45 days or longer. Be patient. Check your credit report before you apply for a new loan. The longer you have an on-time payment history, the better your score will be.
- Your overall qualification improvement. Every time you apply for a loan, your lender will look at your credit. With each inquiry, your credit score has the potential to go down. Don't rush it. It's better to wait until you know you are ready. If you’re concerned, talk to your lender about the changes you’ve made and see if they think you’re ready.
- Pay down your debt: The less debt you have will lower your debt to income ratio which is a factor lenders use to make their loan decision.
Being denied for a home loan can be disappointing, but it doesn't mean you have to give up. One of the best things you can do is to talk to an experienced mortgage professional. Contact a Home Lending Advisor to learn more about the application process and get started on your path to homeownership.