Mortgage Denied? What Can You Do?

Mortgage Denied? What Can You Do?

Have you recently had a mortgage application denied? I know it’s disappointing, but don’t give up, there’s definitely still hope.

First off, recognize that you’re not alone…

How Often Are Mortgages Denied In Underwriting?

According to multiple studies, about 8% of all mortgage applications are denied in underwriting so you’re not alone. 

Frustratingly, this oftentimes happens even after you were pre-approved for a mortgage!

It’s key to understand that just because you were denied by one lender doesn’t mean you can’t get a loan with a different one.

If your mortgage has been denied in underwriting, here are the steps we recommend you take.

Step 1: Call Your Lender

It’s important for you to know exactly why your loan was denied. Legally, they are required to tell you the reason

Sometimes that reason can easily be resolved by working directly with them. Perhaps there was a missing piece of information that you can easily provide. Or maybe there was an explanation that was inadequate, that by working with the person who provided that information, you can help the underwriter better understand your situation.

Never let an easily-resolved issue keep you from owning a home!

But, there is a key issue in the mortgage industry that means you will be more likely to get your mortgage approved if you reapply with a different type of lender:

Step 2: Work With A Lender Who Will Manually Underwrite Your Loan

It helps to understand the process of mortgage underwriting, which can sometimes be the key to getting your mortgage application accepted even if it has previously been denied.

Mortgage Denied In Underwriting – Manual Underwriting Versus Automated Underwriting

Once you submit your mortgage application, it is sent to an underwriter, a person whose job is to review your financial situation and make a decision whether to approve or deny your mortgage application.

There are two ways an underwriter can do their job:

1. Automated underwriting
2. Manual underwriting

When an underwriter is using automated underwriting, they are basically putting a bunch of data about your financial situation (your income, debts, prior credit history, etc.) into a computer program that crunches it all and spits out the approval or denial of your loan application.

They use this program because it saves them time and money, enabling the underwriter to process many more applications per month than they could by using manual underwriting.

The manual underwriting process, on the other hand, is a much more time-consuming process, but rather than having a computer that only looks at the hard numbers, it involves a human being who has the flexibility to look at and understand why things turned out the way they did. 

In other words, if you have any potential issues in your financial situation, you’re more likely to get your application approved if you work with a lender who manually underwrites your loan than one who just wants to save money by using automated underwriting.

Here’s the problem – most of the big mortgage lenders, the ones you see advertising all over the place and the ones your application will probably go to if you fill out a form online to get mortgage quotes, only use automated underwriting.

They also don’t have real account managers who can work with you and the underwriting team to make the loan process flow better, they have a call center where people don’t come to know and understand your situation, they just tell you everything should be fine, and send the loan off to underwriting, where it’s much more likely to be denied than if you’re working with a caring account manager working in your behalf.

This means you’re less likely to get a loan approval from the big heavily marketed mortgage lenders than if you were to use a different type of lender.

And here’s the interesting thing – not only are you more likely to get your loan approved, using them probably won’t cost you any more! The interest rate, closing costs, and everything else, will probably be exactly the same (sometimes even better,) but you’ll get the advantage of personalized attention from a caring staff that considers helping you get a loan to be more important than saving a few dollars on underwriting costs.

Step 3: Review Your Credit

Estimates indicate that between 34% and 79% of all credit reports contain errors. Since your credit report plays a major role in approving your loan application, it is important that you go through your report, line by line, and clean up any mistakes, ideally prior to applying for a loan.

But if you didn’t do that before your application, and the reason for your denial is based on credit-related issues, you should carefully review and correct any mistakes on your application before applying for a different loan.

Three things to note:

1. Request and review your reports from each of the major credit bureaus: TransUnion, Equifax, and Experian.
2. Recognize that getting changes made on your credit report take time. This is why it is best to do a credit review well before you plan to buy a home. But if you are taking corrective action after a denial, you may have to withdraw your current offer, fix your report, then make another offer on a different house later.
3. You can only fix mistakes on your credit report. You can’t remove credit issues if they are accurate. Some of these issues, like bankruptcy, debt settlements, etc. take 7-10 years to “age off” your credit report, so you may need to wait to get into a home until that happens.

Step 4: Seek A Government-Guaranteed Loan

The government wants to help people own homes, and has created a series of loan packages designed to make it easier for certain people to get home loans. These loan packages oftentimes have looser requirements than conventional loans, like lower credit scores, lower down payments, etc.

Types of Government-Guaranteed Loans

• FHA loans 

FHA loans have lower down payment (as low as 3.5%) and credit requirements (credit scores can be as low as 500.) You might even be able to get an FHA loan with a bankruptcy or other major issue on your record.

• VA loans

VA loans are reserved for veterans of military service, active service members, and surviving spouses. You must qualify based on specific service conditions, but once you do, there is no set credit score to qualify, and you can get into a home without paying any down payment. 

• USDA Loans 

USDA loans only apply to properties located in certain areas, but if your property qualifies, you can get into your loan with lower credit and down payment requirements.

In short, if you were denied for a conventional loan, we recommend you work with one of our lenders who can guide you through the process of choosing and applying for a government-guaranteed loan.

Step 5: Consider An Income-Producing Property

I know, that title sounds complicated, but let me give you an example.

What if you were to buy a duplex, live in half, and rent out the other half? Doing that changes your mortgage application because now the income coming from your renter can count towards your personal income, which makes your current debt ratios more appealing.

It doesn’t have to be a duplex either. It could be a home with a mother-in-law apartment in the basement that you could rent out. It could be a triplex, or even a property where the lower level could be rented out for commercial purposes while you live in the apartment above.

Creativity works wonders!

Step 6: Consider Getting A Co-Signer

Sometimes you just can’t get there with your current financial situation. But adding a co-signer can increase your probability of getting approved.

You should be aware that this is not an inconsequential thing for your co-signer. By co-signing on your mortgage they are agreeing to pay everything if you stop making payments. And, their financial situation will also be considered as part of the application.

So you need to seriously consider this option and whether it’s right both for you and the person you are asking to co-sign on your loan. (The last thing you want is to default on a loan on which a family member is a co-signer – putting the full responsibility of paying that mortgage payment onto them – that’s not good for family relationships 

Step 7: Consider Getting Down Payment Assistance

The larger your down payment, the smaller your loan. Though this will not solve all your loan approval issues, it certainly can help. 

Most states and many communities have down payment assistance programs you may be able to qualify for. Most of these programs are for first-time homebuyers only, though you may be able to qualify if you have not owned a home for at least 3 years. Contact your local city and/or county government to ask for more information and how to qualify.

Step 8: Apply For A Lower Loan Amount

Part of the mortgage approval process is based on your loan amount compared to your income. While you may not have qualified for the previous amount you requested, if you make an offer on a less-expensive home or you are able to pay a higher down payment, you may be able to qualify for a new, smaller loan.

Step 9: Wait To Apply Later When You’ve Fixed Your Issues

If all else fails, sometimes you will need to wait a few months/years to fix your issues so you will be able to qualify for a mortgage in the future. In saying this, I realize that fixing issues may not be the easiest thing to accomplish, but doing so is worth it, not only to get into a home, but fixing credit issues can also help make your life easier and decrease your prices for other loans you apply for, and even insurance.

The primary reasons for mortgage denial are:

1. A poor debt-to-income (DTI) Ratio

Loan underwriters look at how much you owe versus how much you earn. They add up all your regular payments on loans, child support or alimony, credit cards, etc. then divide that total by your monthly income. The result is your debt-to-income ratio. If the result is greater than a certain number, they’re almost certain to deny your loan. You can improve this by paying off loans (it is better to pay off one loan entirely while still making your required payments on your other loans than to take the same amount of money and divide it across all your loans, because doing so eliminates that payment from the total payments you owe, reducing your debt-to-income ratio.)

Once loans have been paid off, expect to wait 30 – 45 days for them to appear on your credit report, then apply for another mortgage.

1. New credit applications or loans

It is never a good idea to apply for a new loan, credit card, credit lines, etc. during the time your mortgage loan is being underwritten. But this also applies to new loans in the months preceding your application. Those applications negatively impact your credit score and can result in denial of your loan. It’s best to hold off on these until after you have moved into your new home.

If your loan was denied because of too many hard credit inquiries (the type of credit checks lenders make before granting a loan,) you should plan to wait 4-6 months (with no additional credit inquiries during that time) before you reapply.

2. A new job

Lenders want to see that you have stability in your employment, so they can rely on your having a steady income to pay your mortgage payments. In most cases, lenders will look at how long you have had your current job and the number and time period of your past jobs. Ideally, they’re looking for employment from a single employer for the last two years. If they deny your loan for this reason, you may want to reapply when your job history shows a more steady employment status.

3. Unexplained deposits

Large deposits into your bank accounts are a sign that you may have received a gift or loan to help you get into a house. You will be asked to explain any large deposits made in the two months prior to your mortgage application. Be clear and accurate in those descriptions.

For example, if you took a withdrawal from your 401k to help with your down payment, provide documentation that shows that withdrawal and the accompanying deposit, and tell them the purpose of that deposit, so they are comfortable with what is going on. If you did receive a gift, you should have the giver provide a gift letter, showing who they are, the amount of the gift, and indicating that they have no expectation for it to be paid back. See this article on gift funds for more information.

Frequently Asked Questions

Can you reapply if a mortgage has been denied?

Yes you can, and you definitely should reapply if

• There was a mistake in your previous application or the underwriting process
• There were errors in your credit report that you have corrected
• You previously applied for a conventional loan, and are now applying for a FHA, VA or USDA loan

In many cases, you should reapply with a different lender.

Is it common to be denied a mortgage?

Yes, approximately 8% of all mortgage loan applications are denied.

Can you appeal a loan denial?

Yes, you absolutely should appeal a loan denial if it resulted from an error in your credit report, insufficient explanations in response to their questions, or an error in your application. If this happens, you can request for your loan application to be reconsidered.

How long should you wait to reapply for a mortgage loan?

This depends on the reason for your denial. If you were denied because of something that can be easily fixed, such as an error in your credit report or application, you should wait long enough for those errors to be corrected, then reapply. If you are denied because of too many new credit applications, you should wait 4-6 months, with no new credit inquiries during that period before reapplying.

If you were denied because your debt-to-income ratio was too low, you should pay off a loan or two, and/or increase your income, then apply after a couple of months of that new data showing on your credit report and pay stubs.

Conclusion And Action Steps

Of course, it’s an emotional letdown to have your mortgage application denied. But it’s not the end of the world. Getting approved can sometimes be as simple and finding out the reason for the denial and correcting it. Sometimes it just involves reapplying with a different lender.  And sometimes you’ll need to step back, fix some issues then apply for a different loan later on.