Coping with Mortgage Rejection: Where to Go When You Hear “No”

Date: March 10, 2014

If you’ve recently applied for a mortgage and have been denied, there are a few things you should know. First and foremost, you are not alone. With the many twists and turns the real estate market has taken over the past few years, lenders are rather selective about just who they will, and will not, approve for a home loan. Secondly, having one lender reject your mortgage application is not the end of the road. You do have options.

One of the first things you will want to find out if your mortgage application is denied is pretty obvious: Why? Lenders will provide a standard letter, but you should feel free to ask questions. You will want to know the exact reasons why your application was not approved, so you know what you can work on.

There are a number of different reasons that a lender may deny a mortgage application. A few of those reasons may include:

• If a property’s appraisal comes in at a lower value than the requested loan amount, a lender will not approve the mortgage.
   
• If a borrower’s debt-to-income ratio is not low enough, a lender may deny a home loan.
   
• If a borrower has major credit issues or problems, lenders may reject their loan application.
   
• If a borrower is self-employed and cannot provide proper documentation of their income, their mortgage application may be rejected.
   
• If a borrower has recently been divorced, lost a job or is in poor health, a lender may not approve their mortgage application.
   
• If a borrower is applying for a mortgage on a second home or an investment property, a lender’s terms may be more strict; so, the chances of the mortgage application being rejected are greater.

If you’ve been rejected for a mortgage for any of the above reasons or for any other reason, it is not time to give up on your home ownership dreams; but, it is simply time to regroup and reapply.

There are some things you can do to boost your chances of having your next mortgage application be accepted:

• Try another lender. No mortgage lender or bank has the same approval process and they use different appraisers, too. So, changing nothing, but simply applying with another lender, who has a new appraisal completed, may be enough to get you the mortgage approval you need. Particularly, if you are a self-employed borrower, a smaller community bank or credit union may be able to offer you more flexibility in the mortgage application process.

• Boost your credit score. If poor credit was the reason that your initial mortgage application was denied, you can work on improving your credit score by paying off some credit card debts. By law, your lender or bank must supply you with a copy of your credit report, so you can check there first for potential errors and be sure to dispute any that you may find. The changes to your credit report may take up to 90 days to show, but they may be the factor that changes a lender’s outlook.
   
• Lower your debt-to-income ratio. Not only will paying off credit card debt help to boost your credit score, but it also will directly impact your debt-to-income ratio. So, if that was a reason that your mortgage application was rejected, paying down some debts will quickly lower that ratio and boost your chances of having your next mortgage application approved.
   
• Seek out another type of loan. Just because your mortgage application was denied for one certain type of loan, does not mean there are no other options out there. Consider applying for a different type or loan or a varied interest rate on a particular loan. There are several types of conventional, adjustable rate (ARM) and Federal Housing Administration (FHA) loans available. Your mortgage officer or broker should be able to point you in another direction if your first attempt at obtaining a mortgage fails.
   
• Increase your down payment. You may have hoped to bank some extra cash by putting less money into a down payment. But, doing so, could hurt your chances of being approved for a mortgage. Increasing the money you are able to put down on a home may boost your chances, because you will be applying for a lesser loan amount. When you reapply, trying increasing your down payment and you may walk away with an approved mortgage application.   

The bottom line when it comes to mortgage rejection is that you shouldn’t give up. Talk candidly with your loan officer or mortgage broker about why you were rejected and what other options you may have. An experienced loan officer or broker should be able to recommend a loan program that will work for you.