“My mortgage application was rejected.” That's grim news. But don't worry, it doesn't necessarily mean you won't get a mortgage. Even if a lender rejects your loan application, there are steps you can take to improve your chances of getting a mortgage on your next application.
Here's what to do if your mortgage application is rejected.
How often do underwriters reject loans?
According to data from the Home Loan Disclosure Act, just over 12% of mortgage applications (for both conventional and government-backed loans) were denied in the third quarter of 2023. Credit issues, changes in employment status, and high debt-to-income ratios were the three most common reasons for denial.
What to do if your mortgage application is rejected
If your loan is denied, the lender will notify you by issuing a mortgage denial letter, which will include the reasons why you were denied and information about which credit bureaus were used to evaluate your application.
Contact your loan officer
“It's not surprising” that lenders reject loan applications, says Brian Koss, regional sales director at Movement Mortgage, a national lender based in Winchester, Mass. “The loan officer should have done a proper evaluation at the time of application.”
The mortgage application process is pretty rigorous no matter which company you apply with, and if you have one or more unfavorable points, your loan officer should give you some indication that you may not qualify.
Even if that's not the case, there's no harm in having a heart-to-heart with your loan officer after receiving the letter. “The lender should tell you why your loan was denied. You can take that information to heart and use it to find solutions, get yourself on a better financial footing, and re-qualify later,” says Bruce McCrary, senior vice president of membership and communications at the Washington, DC-based nonprofit National Foundation for Credit Counseling.
Enquire about other types of mortgages
Even if your application is denied, you may still be able to get a mortgage, but you’ll need to look for other loan programs that are a better fit for you financially.
Speak to your loan officer to learn more about alternative mortgage options that may be available to you, such as FHA loans or USDA loans. You may also want to contact a mortgage broker who can pass on your information to lenders in their network who may be able to help with your financing needs.
Do a credit check
Your credit score plays a big role in determining what type of mortgage you can get and what interest rate you'll qualify for, so be sure to take a close look at your credit report to see if there are any errors that could be lowering your rating.
If your credit score isn't great and a lender tells you that's the reason they turned you down, don't assume that's the end of the road for you and the loan: You may still be able to get another type of mortgage, such as a government-guaranteed loan from the FHA, VA, or USDA.
Banks don't necessarily offer every type of mortgage, so if you're turned down by the bank you're putting your cash in, the problem is often with the bank, not you.
“Look for someone who works at a non-depository institution and works directly with mortgage lenders rather than banks,” says Corvi Urling, branch manager at NEXA Mortgage in California. “Mortgage lenders generally have larger portfolios and may be able to provide you with access to different programs for which you may qualify.”
You can also work on improving your credit — that means paying your bills on time and carrying little or no balance on your cards — and you may be able to take advantage of a credit improvement program.
Lower your debt-to-income ratio
Even if you have a high credit score, lenders will still look at how much debt you have, like credit card bills, car loans, student loans, etc., and compare it to your income. As mentioned above, this is called your debt-to-income ratio, and lenders take this ratio into account when determining whether you qualify for a new loan.
For example, if you're already spending most of your paycheck on existing high monthly payments, lenders won't be sure you can make the monthly mortgage payments either. In this situation, you may be denied a mortgage due to student loans, credit card payments, and other financial obligations.
In most cases, lenders want your DTI to be under 43 percent, and if you don't fit that profile, there are steps you can take to improve that number.
“One of the big things you can do is pay off your other debts,” says David Mele, president of Homes.com. “Credit cards are a great place to start.”
Look around
You wouldn't stop buying an outfit because the first one you tried on didn't fit, so don't make the same mistake with your mortgage.
“There are a lot of people out there who aren't bad borrowers, but who have credit issues,” said Raymond Eshaghian, president of Green Box Loans.
Mortgages cater to a variety of buyer profiles, and just because a standard 30-year mortgage works for your local couple doesn't mean it will work for you.
“Never put all your eggs in one basket. The worst thing you can do is get under contract only to find that the moving trucks are parked outside your home and you can't move in,” says Erling, who recommends applying to two or three lenders to reduce your chances of being rejected. “Consumers are under no obligation to take out a loan at any point.”
There's no waiting period required after being denied, but because mortgage applications usually involve a credit check that could lower your score, it's a good idea to wait a while for any issues to clear up.
Having a cosigner can also help you qualify for a loan. For example, if you're a young buyer with poor credit, a lender may approve you more easily if your parents have better credit and are willing to cosign the loan.
Star Alto
Note: adding a co-signer can complicate your application by requiring more supporting documentation.
Why was my mortgage application rejected?
There are many reasons why a mortgage loan can be denied, from credit issues to changes in financial circumstances. Some of the most common mortgage denial reasons include:
Credit issues: Lenders use your credit score to assess how responsible you are with credit and to determine how risky it is to lend you money. If your credit score isn’t high enough (usually the minimum score for a conventional loan is 620) or if you have negative marks on your credit report, the lender may reject your mortgage. Similarly, if you don’t have much credit history, the lender may assume they don’t know enough about your credit management abilities and reject your application. Changes in employment status: Lenders want borrowers to have stable employment and income, so if a borrower has recently taken a new job or has a history of moving from job to job in a short period of time, it may be considered a red flag. High debt-to-income ratio: Your debt-to-income ratio (DTI) lets lenders know how much debt you have to pay each month (rent or mortgage costs, student loans, credit card debt, car loans, etc.) compared to the income you’re making. If you have too much debt, lenders may worry that you won’t be able to repay your mortgage and reject your application. Large unexpected cash deposits: Having ample cash is usually a plus when applying for a mortgage. However, if you receive money unexpectedly and cannot explain where it came from, lenders may be concerned about the source of the money and hesitate to approve your mortgage.
What are the chances of being rejected after pre-approval?
Getting rejected for a mortgage can be especially tough if you've been pre-approved for a mortgage, but it's important to understand that being pre-approved for a mortgage doesn't guarantee you'll get financing.
A pre-approval is an agreement in principle to lend you a certain amount of money based on your creditworthiness. In other words, it acts as a preliminary go-ahead from the lender. However, this is not the same as a lender agreeing to fund the purchase of a specific property. That's the purpose of applying for a mortgage.
If you get pre-approved, your chances of getting a mortgage are high. But that's not always the case. If your financial situation changes between pre-approval and final approval, you could be rejected. For example, if you change jobs, take on more debt or have negative marks on your credit report after you're pre-approved, a lender may notice red flags and reject your application.
Frequently asked questions about mortgage application rejections
What is a mortgage denial notice?
A mortgage denial letter, also known as a denial letter or adverse action letter, is a formal written notice provided by a lender to a borrower when a mortgage application has been rejected. The letter outlines the reasons why your mortgage application was not approved and provides details of the factors that influenced the lender's decision.
The main details that are usually included in a mortgage denial letter are:
Explanation of denial: The letter will state that your mortgage application has been denied and will explain the specific reasons for the denial. Common reasons include credit issues, insufficient income, high debt-to-income ratio, concerns about your employment history, or issues related to the property itself. Credit information: The denial letter may include details of the credit report used in the decision-making process, including which credit bureau was used, the credit score obtained, and any negative factors that influenced the decision. Legal rights: Lenders are required by law to provide information about borrowers' rights under the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA). This includes details on how to obtain a free copy of the credit report used in the decision. Contact information: The denial letter will usually include contact information for the lender or a designated representative who can further explain the reasons for the denial and provide advice on next steps to take. Reconsideration options: In some cases, the denial letter may include information about potential options for the borrower to reconsider their application, such as submitting additional documentation, addressing credit issues, or considering alternative loan programs.
What happens if funding is denied at contract signing?
A recent job change, big purchases on a credit card, a new credit application, etc. could prevent you from getting approved for a mortgage on the closing date. If this is the case, consider taking a step back from the home buying process to improve your credit and pay off any debt you have before looking for your next home.
Can I get a mortgage with my student loans?
Yes, it is possible to get a mortgage even if you have student loans. However, student loans are considered part of your total debt and may affect your ability to qualify for a mortgage. They may also affect your debt-to-income ratio (DTI), which is an important factor that lenders use to evaluate your financial situation and ability to repay a mortgage. Based on that, lenders will decide whether to approve you for a mortgage and how much they will lend you.
Conclusion
The mortgage lending process often comes with good and bad points, so try not to get too disheartened if a lender denies you a mortgage. If that happens, take the time to understand why your mortgage was denied, address the issues, and explore other loan options.