Being rejected for a home loan is disheartening, but it doesn’t mean you won’t ever get approved. With a few simple steps, you can get yourself back on track. These changes won’t happen overnight, though. It will require some planning. Take your time and figure out what will benefit you the most, then put your plan in action. Before you know it, you’ll turn that direction into an approval!
Determine the Reason You Were Rejected
The most important thing to do is figure out why you were rejected. No two applicants will have the same reason. Any lender that turns you down must supply you with a letter giving you the reasons why. You’ll receive this letter within 30 days. You can also set up an appointment with your loan officer to discuss the reasons.
Your loan officer will have a copy of your credit report as well as the underwriter’s reasons for turning you down. Since he is an expert in the industry, he can give you advice on what to do. Remember, this will only pertain to this particular lender, though. Each lender has their own requirements. If you plan to shop around, you should do your own homework first. This will help you determine what will help your situation the most.
Fixing Your Credit
A low credit score or damaged credit history are two of the most common reasons applicants get denied for a home loan. If this is the case for you, you’ll need to fix your credit. The most common issues include:
- Too many late payments – You’ll need to bring your accounts current and continue paying them on time for your score to improve.
- Too much credit outstanding – Lenders don’t like to see more than 30% of your available credit outstanding. Try paying your credit card balances down or off in order to lower this amount.
- Too many inquiries – If you have had many recent inquiries, lenders may turn you down because they can’t determine what new credit you’ve taken out. Wait until more time passes for the inquiries to become “old news.”
No matter what you do, don’t close any old accounts, though. This will only lessen your average account age. This can hurt your credit score. Credit bureaus take the average age of all of your accounts. The older your accounts are, the better your score. The ideal situation is to pay your accounts down or off, but keep them open and unused.
Try a Different Loan Program
Chances are that there is another loan program that might suit you better. For example, if the lender says your debt ratio is too high for a conventional loan, you might qualify for an FHA loan. This program offers a little more leniency for debt ratios. The same is true for credit scores and credit issues.
If the lender determines you don’t have enough money for the required down payment, you can try an FHA or USDA loan. The loan you choose depends on the location of the property. USDA loans are for rural properties only. However, you might be surprised to learn which boundaries are rural in your area.
You can always try a subprime loan as well. These are loans that lenders hold on their own books. In other words, they create their own rules. They don’t have to listen to the investors in the secondary market, namely Fannie Mae or Freddie Mac. This means they can make exceptions for certain things that they don’t see as risky.
Shopping around can offer you the most options as well as some of the best deals.
Renegotiate the Contract
Sometimes the purchase price is just too high for you to qualify for a loan. It could be because the home doesn’t appraise for enough money or you don’t have enough for the down payment. Don’t assume the seller won’t negotiate without asking.
Talk to the lender about your options. Be honest about your inability to secure financing at the current purchase price. He may be willing to lower it. You never know how much he was expecting to receive for the home. What if that figure is lower than the amount you agreed to pay? This means there’s some wiggle room in the price. If it’s just a few thousand dollars that makes a difference, then the seller might agree.
Wait it Out
If you were rejected for a home loan because your job is too new, you can wait it out. Sometimes lenders use a 2-year average of your income. If you have a new job with higher income, it won’t average out as high as it is with the lower income still included. Waiting until you have 12 months of income at your new job will help you have a higher average income.
This is especially important if you changed jobs and now work for yourself. Lenders don’t want to take the risk on a newly self-employed borrower. They want you to have some type of experience. If they can see a full 12 month cycle of your business, they can have a better idea of the income you make, helping them determine if you can afford the loan.
Talk to the Lender
Don’t be shy about talking to someone that turns you down for a loan. While it might be embarrassing, there’s a lot you can learn. You might not know certain things about your credit history or that your income isn’t as stable as you thought.
Lenders aren’t in the business of turning people down just because they want to. The do it in order to protect you. This is especially important in the aftermath of the housing crisis. Lenders have to be stricter about who they approve. They must follow the Ability to Repay Rules at a minimum. This means the lender does their due diligence in making sure you can afford the loan. If the lender also wants the protection against litigation, they’ll need to follow the Qualified Mortgage Rules. This makes it slightly harder to secure a loan unless you have a cut and dry situation.
Talking to the lender can help you understand what you need to change. You may find that it only takes a few simple changes and a little time to get the approval you need.
Of course, you always have the option to shop around. If you are turned down for a conventional loan, consider a government-backed or subprime loan. If you are turned down for a subprime loan or even a government-backed loan, shop around. Different lenders have different requirements. You won’t know which lenders are more lenient until you shop around. Applying with several lenders in a short amount of time doesn’t harm your credit. The credit bureaus count it as one inquiry because they understand the importance of shopping around.
Whether you do, don’t give up! Being rejected for a home loan isn’t the end of the world. There are other options out there, even if it means you have to wait a little while! Eventually, you’ll get the approval you deserve.