Currently, mortgage rates are at a 3-year low, and renters are learning it may be cheaper per month to buy your own home.
According to several loan companies, more applicants are currently being approved than at any other time in the last 10 years. Lending standards have loosened up, so more buyers can qualify.
But not everyone is going to.
Some refinance applicants and would-be home owners are still finding themselves turned down.
Luckily, a denied mortgage application should never be the end of your goal to be a home owner. The key is for you to know why you are turned down.
Ask your lender why your mortgage application was turned down
When it comes to mortgage denials, lending regulations favor the consumer side. If your mortgage application has been turned down, lenders must send you a formal denial letter known as a Statement of Denial or Adverse Action Notice.
However, this letter isn’t always clear. Sometimes, the language or terminology is not familiar to the consumer. For example, it might say “value or type of collateral not sufficient,” which means that the home’s value was lower than expected, or there was an issue with the appraisal.
Because these letters aren’t always specific, it is important for you to contact your lender if you have questions. You have a right to know the reason you were turned down and to understand it.
Common reasons for denied mortgage application include:
- Your downpayment is too small.
- Your debt-to-income ratios is too high.
- Your credit score is too low, or you have inadequate credit.
- Your loan-to-value ratio is too high.
Regardless of the reason, you usually can correct it with some time and effort. In fact, there are times that turning a denial into an approval is actually quite simple.
Are there other loan options available?
You need to know exactly why your mortgage application was denied so that you can figure out the best way to move forward. That way, you can press the issue with your current lender, or perhaps, you might want to apply elsewhere. However, before you put things on hold, you should assume that your lender has not exhausted all options.
Reasons that might explain why a solution was overlooked by the lender:
- The lender might not offer alternative programs.
- Your loan officer is inexperienced with other loan types.
- The underwriter missed a key piece of information.
Of course, there are times when your mortgage application could be turned down for reasons that may disqualify you for one loan, but not every kind of loan.
For example, if your query was denied because your credit score is too low for a conventional loan, you might be still able to qualify for an FHA loan. Typically, conventional loans need a higher credit score and are less lenient for past credit mistakes.
Raise your appraised home value or your credit score
The fix for your mortgage application could be as simple as a quick correction to your credit report. It might be a matter of a couple more points on your credit scores, and the lender might be able to tell you how to increase your credit scores with the help of a rapid rescore.
Non-occupied co-signers can be another option. These are individuals who help you to qualify for the mortgage, but who will not be living in the house. The lender will consider the co-applicant’s income with yours. This will reduce your debt-to-income ratio, and that increases your chances to be approved.
If you were turned down because of the appraisal value of the home, you might want to look at using another lender. Different lenders use different appraisers.
Even when you believe you have exhausted all of your options for qualifying to get a mortgage, you should not let that stop your refinancing plans. If you didn’t qualify one year ago, you may have a chance this year with a new loan program that has become available. For example, the HomeReadyTM mortgage program requires you to have only 3% down, and applicants are allowed to use income from non-borrowing household members in order to qualify.
If you don’t qualify today, you might qualify tomorrow as lending rates are constantly reducing their lending requirements.