The most important thing to remember if you’ve been denied a mortgage is that you still have options. The world is not over, and neither is your quest to find a new home! According to the Mortgage Bankers Association, about 30% of purchasers who apply for a mortgage are turned down, so it’s a fairly common occurrence.
There are many reasons why a lender might deny a loan application, so the first step to securing your next loan application is to ask what went wrong with the first.
By law, you are entitled to a disclosure letter which details why you were rejected, and if you don’t understand it as well as you would like, sit down with your loan officer and ask them to explain it to you. Once you know why you were denied, you can improve your chances for your next application with these strategies.
1. Waiting it Out
If you were denied due to your credit score and you don’t need to buy a house right away, wait it out. You can use that time to build your credit score, organize a better record of your finances and assets, save up more for your down payment, and settle any standing debts. In the interim, you should avoid applying for any new credit cards, trading in a car, changing jobs, closing any accounts, or even buying furniture. These can all hurt your credit score and may disincline lenders to considering your application.
Bumping your credit score up to 620—the lowest score most lenders are comfortable with— or higher can take a few months to a few years depending on your situation, so carefully consider your options before going this route. The closer your score is to 620, the more likely you are to build your score in a short amount of time. However, if your score is 590 or lower, you need a house within the year, and your score is being hurt by a recent foreclosure or bankruptcy, you might want to consider applying for a government-backed loan.
2. Applying for an FHA Loan
If you were denied a mortgage because you didn’t have enough money to cover the house you wanted or the closing costs and down payment, you might want to consider applying for either a VA loan or an FHA loan. Only veterans can qualify for VA loans, but the FHA loan is a great alternative for civilians.
The FHA is a federal loan which offers lower down payment options than a traditional loan. It’s also insured against default, so if you can’t pay back the loan, the government will cover the difference and repay the lender. Even the most skittish of lenders is unlikely to turn down a loan with that guarantee. Best of all, there are no restrictions on who qualifies for an FHA loan, so all you need to do once you get to your mortgage lender’s office is ask for the application!
Of course, there are some things to consider before applying for an FHA loan. That insurance against default, known as a Mortgage Insurance Premium, is an upfront fee in the FHA program—about 2.25% of the loan value—and can, in some cases, cost more than a traditional MIP. In addition, you will be charged a monthly amount for your MIP, which is about 0.55% of the loan value. This may not seem like a large amount at first, but it can become a very expensive pay-off over time, so make sure to carefully weigh your options before applying for an FHA loan.
3. Finding Another Lender
If you think your credit score, debt-to-income ratio, and ability to pay any upfront or monthly fees are more than adequate, or if you feel like your lender denied you unfairly, you can always find another lender. Community banks tend to have more flexible standards than large branches, especially for self-employed individuals. If you haven’t already, you should get a pre-approval before applying for another mortgage. A pre-approval will help you understand what’s in your price range and will demonstrate to the lender that you’re an informed buyer and more likely to assert yourself.
Before looking for another lender, however, make sure that you honestly consider your eligibility. Do not turn to another or less trustworthy lender out of desperation; you’ll end up losing more money in the end, and probably see your credit score sink as the bills pile up. Only consider this option if you are completely confident in your eligibility for a new loan, your credit score is at least 620, and the reasons for your denial have more to do with the bank changing its regulations or the home appraisal going awry than with a lackluster financial record on your part.
Overall, the best way to recover from a denied mortgage is to educate yourself as to why you were denied and how you can improve your next application. Knowledge is power, especially when it comes to the credit industry! If you do your research, save up your money, and stay patient, you’re bound to be successful on the next application. Regardless, don’t let it get you down! It sucks to get denied, but it’s not the end—you still have your whole future ahead of you, you just need to go for it.