I Need a Loan but Keep Getting Declined: Here’s What You Should Do Next

Reasons your mortgage application was rejected

rejectedNobody likes rejection because it hurts. A home loan application that has been denied is especially debilitating because it shutters one of the biggest dreams in life- home ownership. However, it shouldn’t be the end of the world when a lender rejects your application. There is always a second chance. Mortgage lenders are supposed to explain to unsuccessful loan applicants why their applications were declined. They normally give a free credit report that was used to make the decision. If you get such a copy, you should use it to address your weak areas and start working on them so you can be approved in your next application. The loan can be denied for reasons such as:

  • Missed debt payments
  • Too small a down payment
  • Poor credit history
  • Too low DTI
  • Lack of a savings account
  • Lack of proper income statements
  • Recent application of credit cards and other loans
  • Monetary gifts
  • Moving a huge sum of money
  • Over-drafting the checking account
  • Job inconsistency

Here are the right steps to take when you are denied a mortgage.

Make an appointment with the loan officer

If your lender doesn’t give reasons for your disapproval, you have the right to ask them what went wrong. It could be your income, small down payment, or credit issue. Ask the loan officer to point out the specific areas of concern. Perhaps you need to add a few thousand dollars to your down payment in which case you can save up and re-apply.

If your credit report had issues, your lender should provide the name of the agency used and a copy of your credit report. From there you should take the right steps to improve the credit score. If the application was brushed-off due to income inadequacy, consider other home financing options for borrowers in low-income classes. Different lenders provide different approval benchmarks and you should know your options before you try something. Don’t forget that you can always negotiate the terms and rates with your lender to reduce the loan amount.

Bottom line is being aware of the reason for your disapproval helps you to apply smartly next time. However, you shouldn’t apply for more than 5 home loans in a period of six months.

Consider a different type of mortgage

Consider a different type of mortgageThere are several types of mortgages which come with different sets of guidelines. The key is working with a mortgage consultant to find what mortgage fits your financial situation. If you are strapped for cash, a conventional mortgage is an ideal option for you because it requires only about 3% of security deposit. But you need a credit score above 620. If your credit score doesn’t allow, consider other options like FHA home loans which are not stringent on credit scores. You might even be approved with as low as 580 credit score and at least 10% down payment. Certain lenders are committed to assisting homebuyers to qualify for home loans regardless of their financial situations. So, when you don’t qualify for one type of home loan, ask the loan officer for an alternative option. If you don’t speak up, you might not be assisted.

Find another lender

Just because one lender denied you a loan is not to mean that the entire industry has turned you down. The mortgage lending sector is quite flexible. Banks normally check your prevailing debts and income to calculate the DTI and determine if you are an eligible borrower. In general terms, your DTI must not exceed 36%. There are banks that are very strict to DTI. If your debt burden exceeds 36% of your gross income, they cannot approve your loan application unless you pay off some debts. Nonetheless, other lenders are a bit lenient and can allow a DTI up to 45%. Therefore, when a big bank rejects your home loan due to a high DTI, don’t lose hope yet. Go to another lender like a credit union or the local community bank.

Work on your credit report

credit reportIf you are a first-time home loan applicant, you should know that checking your credit report before applying for a loan is mandatory. You can get it free of charge from one of the three credit reporting bureaus every year. Perhaps you did not bother to check your credit history before applying for the home loan and that is why you were turned down. It’s high time you review it and clean up the mess. It takes minor errors to pull down the credit rating thereby hampering your chances mortgage approval. Thus, you must dispute erroneous information on your credit report that is tarnishing your credit status. Even if the information was reported by mistake, your lender won’t care and will see you as a risky borrower until the issues are resolved. Removing those errors might take a few weeks. You might also want to pay off some debts to boost the credit score but it takes one to two months for that change to be reflected on the credit report. Because mortgage processes are time-conscious, enquire about rapid scoring to get the credit report updated quickly. With rapid scoring, your creditor can acknowledge the error. The good thing about rapid scoring is that the credit is updated within 3 days. The lender will verify the updated information forts and sent the right documents to a credit reporting bureau. The charges for such a service differ from one mortgage lender to the next.

Final word

Mortgage rejection can be a big shock but you shouldn’t take it lying down. One denial should not discourage you from becoming a homeowner. It only means that you are not a suitable candidate for a particular lender at that point in time. Just make sure you have gotten to the bottom of disapproval. Luckily, most lenders dint leave you guessing as they provide an explanation for the denial. Don’t fret because there are many ways to get approved as explained above and move on with home-buying. Check out how much mortgage you can afford.

Mona M.

Mona Moore is an expert in homeowners insurance policy coverage, policy language, and helps first time home buyer's to determine the insurer's obligations.