Mortgage Application Denied? What to do Next.

Blog posted On June 20, 2018

A mortgage application can be denied for a number of reasons.  There is nothing more heartbreaking than going through the home shopping process only to have financing fall through.  LendingTree reports approximately 8% of mortgage loan applications are denied nationwide.  While it’s a setback, mortgage application denial does not have to mean the end of your home search.  Taking these proactive steps after having a mortgage application denied can help you with your future home search.

Find Out What Happened

The mortgage financing process is fairly extensive.  Before a mortgage is denied, there will usually be some red flags along the way.   A diligent loan officer will keep you informed throughout the process.  If there are potential concerns along the way, like a high debt-to-income ratio or a low credit score, your loan officer should let you know in advance, so you can address these issues before proceeding with the application.  

Reduce Your Debt-to-Income Ratio

The federal government’s eligibility cutoff for a qualified mortgage is 43%.  Acceptable levels of debt-to-income ratio vary depending on the lender, the type of mortgage, and other components of the borrower’s financial profile.  If your mortgage application is denied because of a high debt-to-income ratio, start making a plan to pay down revolving debt, like credit card debt, and consider consolidating or refinancing nonrevolving debt, like student loans.  Consulting a financial advisor is one way to develop a beneficial debt repayment plan.

Improve Your Credit Score

Most mortgage professionals recommend credit repair at least six months to a year before you start shopping for a home.  Credit incidents, like a few missed payments or an overdue account, can negatively impact your score immediately and it will take some time to rebuild.  Different loan programs have different credit score requirements, but any and all credit score improvements will help your home buying search.

Increase Your Down Payment

In some cases, a larger down payment can improve your chances of securing a mortgage loan and even offset the need for mortgage insurance or higher interest rates.  According to Zillow, saving for a down payment is the number one reported obstacle to homeownership.  Ask your lender or real estate team about grant opportunities and other down payment assistance programs and find out if you qualify.  HomeFundIt^TM, the down payment crowdfunding platform by CMG Financial, is another way to increase your down payment with contributions from friends, family, and others in your personal network.  Through HomeFundIt, all funds are ready to be used at the time of home purchase.

Having a mortgage application denied is a setback in any home search.  Avoid mortgage application denial by working with a trusted loan officer that keeps you informed throughout the process.  Evaluate your financial situation by getting prequalified or preapproved before you start shopping.  Identify potential red flags that may come up and address them ahead of time. 

Sources: Bankrate, LendingTree, Refinery29