What Should You Do If Your Mortgage Application Is Rejected?

You applied for your dream home only to be denied. What now? While it’s never a great experience to find out your mortgage application has been rejected, there are some things you can do to help improve your financial situation and increase your chances of approval. That’s where this post comes in; it’ll give you a few tips on why your mortgage was rejected and how to avoid being denied a home loan again.

Why was your mortgage denied?

A low credit score

Credit scores are based on how well you’ve managed credit in the past. If your score isn’t as high as lenders like to see, they may be reluctant to offer you a loan – or they might want to charge you more for it.

Fortunately, it doesn’t take very long to build up a good credit score if yours isn’t great right now. Even making minor improvements over time can help your cause. For example, paying down some debt can improve your credit utilization ratio and make you look like less of a risk in the eyes of lenders and creditors alike.

Too much debt

In addition to having a low credit score, you may be denied a loan if you have too much debt compared to your income. Lenders want to ensure you can make all of your monthly payments, not just the monthly payment of your new mortgage.

A good way to do this is to look at how much debt you currently owe and compare it with how much income you’ve earned over the past two years. After seeing how much debt you currently owe versus how much income you’ve earned, lenders will then determine if you can pay back another loan. If not, they will most likely deny your application.

Identity theft

If you have been a victim of identity theft, your credit may be in poor shape. You may have trouble getting a mortgage until all of the bad debt from your identity theft has been resolved. Unfortunately, that can take months or even years if a thief is particularly good at hiding their tracks.

In this case, the best thing you can do is freeze your credit and pay down your outstanding debts.

When all of the damage has been repaired, and you’ve rebuilt your credit score over time by opening new accounts and paying them on time each month, you may be able to apply for a mortgage again. Your lender will likely need to see proof that your bad debts were removed before they approve your application.

Lack of credit history

Typically, a borrower needs two major credit accounts (installment loans) and two revolving lines of credit (credit cards or a home equity line of credit) to qualify for a loan. If you have less than this – or if all your credit accounts were opened recently – it can be challenging to get a loan.

Lien or judgment

Liens and judgments are two different things, but both can complicate your life if you have them. A lien is a voluntary claim against your property by someone to whom you owe money. It’s typically placed on the home by a contractor who hasn’t been paid for work on the house or by a company that sold you materials used in home improvement projects.

It makes it impossible to sell the home until the lien has been released – either because you’ve paid the person who filed it or because a court has decided that he or she doesn’t have a valid claim. Liens are typically filed by contractors who are owed money, but they can also come from unpaid taxes, child support, or other debts.

A judgment is similar but different. It’s a court ruling that you owe someone money and often comes with an order that some of your assets be turned over to pay it off (your house might be one of those assets).

Both of these issues can make it challenging to get a mortgage. If there’s a lien on the home, any mortgage lender will want to see that it’s been resolved before approving any loans.

Things you can do to do so that your mortgage application is not denied again

Deal with your credit score

No quick fix or overnight adjustment will magically give you an excellent credit rating. Instead, it will take time for you to see substantial results from any efforts you make to increase your score. You may find yourself waiting several months before you can apply for a mortgage again.

Pay your debts

If you want to improve your credit score, the first step is to make sure you pay all your debts on time. If you have any outstanding debt, try to pay it off as soon as possible – this will show lenders that you are a responsible borrower.

Stabilize your income

If you have experienced a recent drop in income, you will need to demonstrate to potential lenders that it was due to circumstances beyond your control. A job loss is not necessarily a deal-breaker, but it is essential to show lenders you have since recovered and are back on track financially. If you have since found a new job in the same field, with the same or better pay, that can work in your favor; also, do not forget to pay your taxes.

A denied mortgage application will sting, but don’t let that dissuade you from pursuing your dreams of homeownership. This guide should help get you back on track to a home purchase, and we give valuable tips on minimizing the impact on your credit rating.

About US

Cape Coral Mortgage has been in Florida for 20 years with over 100 years of combined experience in the mortgage industry. Our team has vast experience in all phases of mortgage lending.

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