If at first you don't succeed, try, try again
- Make sure your credit score and debt-to-income ratio are the best they can be
- Take advantage of down payment assistance and low down payment programs
- Different lenders have different criteria—shop around til you find the best one for you
Getting denied for a home loan, although inconvenient, is not the end of the world. The important part is to understand why you were rejected and work toward fixing the problem.
Top reasons loan applications are rejected:
- Subpar credit scores
- High debt-to-income ratios
- Inadequate down payment amounts
- Low appraisal values
A poor credit score is the most common reason loans get rejected. To even qualify for most conventional loans, a score of 620 is required. If you have a lower score, you may be eligible for a Federal Housing Administration (FHA) loan. Don’t worry if your credit isn’t perfect; there are ways you can repair your score.
Although errors can be difficult to find, they could very well be wreaking havoc from the depths of your credit report. Finding and fixing them can boost your score noticeably. Remember, you're entitled to a free annual copy of your report and should take advantage of this to sniff out potential discrepancies. It can take a month or longer to correct mistakes, but you can speed up the process by filing for a rapid rescore.
If your credit score has no errors, it may just need some TLC. Make sure you’re borrowing within your means and paying your bills on schedule over the coming months. Eventually, with some discipline and time, your score will improve.
This ratio is as straightforward as it sounds; a ratio of monthly debts compared to monthly income.
Simply put, lenders don't like to see high ratios. It signals to them that you're already up to your elbows in debt and that more debt on your plate may be too much for you to handle.
At this point, you have a couple of options: attempt to pay off some debt and try again or speak with other lenders. Different lenders have different debt-to-income ratio requirements, which means that while one lender may decline you, another may be completely willing to loan to you. Don’t throw in the towel after talking with just one lender. Shop around until you find the right lender for you!
Most lenders prefer a 20% down payment. However, if you can’t scrape together 20%, there are ways around this long-standing (and some say outdated) tradition.
Lenders like to see larger down payments because it signals that you're personally invested in the property, and therefore, more likely to keep up with payments. Agencies such as the FHA and Department of Veterans Affairs can help you lower your down payments.
In general, the higher your down payment, the better. Dipping into retirement savings, receiving money from family and using down payment assistance programs are all ways to get funds fast, but should always be used responsibly.
A lower-than-expected appraisal value could also result in loan request rejection. When the property’s value isn’t high enough to back the loan, the lender will most likely decline your loan request.
Unfortunately, appraisals tend to vary due to their subjective nature. Even though this is a reoccurring issue, a second appraisal is typically not allowed during the loan approval process. You can ask for an appraisal rebuttal, but they rarely end up working in your favor as a buyer.
A common next step is to apply with a different lender, as you'll also get a new appraisal. Don’t be afraid to play the field with lenders until you find the right one for you.
Time for one more shot
It's no secret that using Home Savi is a great way to significantly reduce home buying costs. Representing yourself and saving big could be the final push you need to make your home ownership dreams a reality.
Ready to give it another try? Before you go, learn more about how to find the best mortgage lender for you.