What to do when your mortgage application is refused
You have decided to do it: you are going to take the plunge and buy a house. You apply with a local mortgage lender or online, only to be notified that your application has been denied. Although it is disappointing, you are not alone. Mortgage refusals happen to a lot of people. The first thing you should do is get up, dust yourself off, and explore your other options.
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According to the Equal Credit Opportunity Act, if credit played a role in your loan denial, lenders must provide you with a letter outlining the details. Here are the top four reasons why loans are refused:
- No credit: If you are just starting out, you may not have had time to build up enough credit history for a lender to feel confident in lending you.
- Low credit: Your credit score tells a lender how you’ve handled your credit in the past. If your score is low, the lender will worry that you don’t pay off a mortgage as promised.
- Job change : Lenders love that you have been in the same job for a while. This gives them the reassurance that you are not going to quit your job to join the rodeo the moment you close a house.
- A sudden influx of money: Suppose a lender examines your bank accounts and notices a large and unexplained cash deposit. In this case, he naturally begins to think of one of two things: maybe someone loaned you the money and you need to pay it back. Or maybe the money is dirty and there will eventually be an episode of Law and Order based on your exploits. The lender wishes to avoid either situation.
Different mortgage lenders have varying appetites for risk. While one lender may have turned you down, another might find you the “ideal” candidate for a loan. If the reason the first lender turned you down was bad credit, you can apply for a loan from a lender that specializes in bad credit mortgages.
However, if your loan application is approved, you can expect to pay a higher interest rate. This is because the business model of this lender is “greater risk for greater reward”. In this case, earning more interest on the loan is the payoff.
Remember that applying for a loan will slightly affect your credit score. When shopping for a mortgage, try to apply for all loans for a short period of time (two weeks should be enough). This way, the credit reporting agencies recognize that you are making rate purchases, and you will only be hit once, even if you apply to a dozen different lenders during that window. .
Explore owner financing
Ask your real estate agent to help you locate properties offering owner financing. Here’s how it typically works: You make a down payment and sign a loan agreement (just like you would any property). You make a monthly payment based on the agreed interest rate directly to the owner for a set number of years (usually five to ten). At the end of this fixed period, you have a lump sum payment due. You then refinance the loan with a mortgage lender and pay off the balance owing, or sell the property and pay off the balance.
Owner-financed homes can be hard to find in a trendy seller’s market, but it’s an option worth exploring.
Group and try again
If a homeowner’s finance deal is not possible and you can’t find a lender to approve your loan at an interest rate you can afford, it may be time to fix the issue that kept you from paying. ‘get a mortgage.
Maybe you just need to stay a little longer at your job or provide proof of a source of cash. Or maybe you need to take the time to build up a long enough credit history that lenders have confidence in your ability to repay.
If a low or bad credit score is an issue, here are some steps that can help you increase your score:
- Check your credit reports. One in five Americans who check their reports find at least one error. Even one mistake can lower your score. Your first step should be to order a free copy of your credit report. You can get one from each of the three major credit bureaus and check them, looking for incorrect information. If you find anything, report it to the agency in question. They then have 30 to 45 days to prove the information is correct or remove it from your credit report.
- Pay off existing debt. 30% of your credit score is based on the amount you owe creditors of all kinds.
- Make all your payments on time. Although it will take months to see results, this is the easiest way to increase your credit score.
- Take out a secure credit card. Let’s say you want a spending limit of $ 1,000. You deposit $ 1,000 on the secure card and borrow from those funds. Like a regular credit card, you make monthly payments that are reported to the credit bureaus.
You might be disappointed to have your mortgage application turned down, but there is no reason to believe that you are defeated. Tackling the root cause of loan denial is the surest way to get back into the race at home.
And when you’re ready to try again, be sure to check out our guide on how to apply for a mortgage.