If you’ve been turned down for a mortgage, you’re not alone. The subprime mortgage crisis of 2007 has caused lenders to tighten restrictions on issuing mortgages.
What should you do, and what should you not do?
First, don’t apply to several other lenders, hoping that one of them will say yes. Every time you apply for credit, the credit reporting agencies are notified. Lenders look at credit reports, and they become suspicious of anyone who applies for an unusual number of loans in a short period of time.
The very first thing you should do is ask your lender for a written explanation for your denial. By law, your lender must provide you with this information within 30 days of your request. This explanation is known as an “adverse action notice,” and it may be able to help you get a mortgage by identifying your credit weaknesses.
The adverse action notice may indicate that you were turned down for a mortgage because your income is insufficient, or your work history is either too short or is spotty.
If the problem was your income, double-check to see if you gave your lender a list of all of your sources of income. Regular payments to you such as child support, alimony, dividend or investment income, social security payments, disability payments, and other payments are considered as income.
It may also be that you were turned down for a mortgage because your income was insufficient for the size of the mortgage you were applying for. If that was the cause for your refusal, then consider finding a less expensive home to buy. Once you build equity in the less expensive home, you can trade up to the level of home you wanted initially.
If your employment history was the reason your lender refused your mortgage, there may be little that you can do other than wait until you’ve been employed long enough to meet the lender’s requirements. One option, though, might be to ask a close relative or friend to be a co-signer on a mortgage application.
The most common reason today for mortgage refusals is a bad credit history. The three major credit reporting agencies–Experian, Trans Union, or Equifax–can provide you with a copy of your credit report. If your credit score is below 620, you’re regarded as a subprime borrower, meaning that you’re regarded as something of a credit risk. Before giving up, though, examine your credit report carefully. It’s not uncommon for erroneous information to show up in a credit report. For example, you may find a credit problem on your report that was the fault of someone with a name identical to yours. If you find a mistake, contact the credit reporting agency or the creditor who made the mistake to have your record corrected.
Yet another reason for a mortgage refusal is that you have an insufficient credit history. In other words, you haven’t borrowed enough money in the past. While that may seem like a strange reason, consider the lender’s point of view: how can a lender know how you handle debt if you’ve never had any debt?
If you were turned down for a mortgage because you don’t have a credit history, that will take a little more time to correct. You’ll need to borrow money: get a credit card, get a car loan, or some other type of extension of credit. Once you can show that you handle debt well, your chances of being approved for a mortgage will be much greater.
You may also have been refused a mortgage because you didn’t have sufficient funds for a down payment. If that’s the case, you have some options.
One is to apply for an FHA-backed mortgage. FHA loans require down payments of as little as 3%. Or, if you were in the military, you may qualify for a veterans loan, which requires no down payment. If the home you were looking to purchase is in a rural area, you may qualify for an RHS loan, which also requires no down payment. Yet another option is to purchase private mortgage insurance (PMI), which can allow you to put down as little as 5%.
In the end, though, the best way to avoid being turned down for a mortgage is to know in advance what lenders will examine in considering your loan request. A little homework goes a long way.