What should you do if your mortgage application is rejected?
Here’s how to fix the trouble spots so that you can successfully reapply as soon as possible.
Find out why you didn’t qualify:
Common reasons a mortgage application might fail to receive the green light include:
- Your credit score is too low
- You are self employed (and therefore are perceived as a risky borrower)
- Your income is too low
- The property is considered a risky investment
Your credit score is too low
In general, lenders look for a minimum credit score of 620, but some lenders will reject anything under 660. To qualify for the best mortgage terms, you will need a credit score of 740 or higher. A low credit score usually indicates that you have defaulted on loans in the past, accumulated a history of late payments, or that your debt to income ratio is too high.
You can improve your credit score by:
- Paying down your credit card debt and minimum payment before they’re due.
- Keep your balance low: Aim to tap into less than 35% or your credit limit.
- Keep several credit cards active, using them for small payments and paying off the loan immediately.
- Attack unattractive debt: Pay off your no-cash-down debts first, such as student loans and credit card debt, as aggressively as possible.
- Double check for errors: Credit report errors can cause your score to drop by more than 50 points. Make sure to get a second opinion if you have any doubts about your low score’s accuracy.
You are self employed, or you’re not making enough money
If you are self employed and/or your income fluctuates widely from year to year, you may need to take extra steps when applying for a mortgage loan.
- Put down a larger downpayment, so that your monthly mortgage payments will be lower
- Having a co-signer on your file could come in handy. Consider asking a financially stable family member to co-sign on the property. When selecting a co-signer, keep in mind that they will receive title ownership to the property.
- Lower your budget by searching for properties listed below market value, such as repossessions and fixer uppers.
The property is considered a risky investment
In some cases, banks will deem that a property’s value isn’t enough to back the amount of the mortgage loan being applied for. Lowball appraisals are a common reason for rejected mortgage applications. If this happens, you should:
- Shop around at various banks, as some lenders are more risk adverse than others.
- Ask a mortgage broker to help you find a suitable lender.
- Opt for a private lender
- Resume your property search for a safer property