How to Respond When Your Mortgage Application is Rejected
Receiving a mortgage rejection letter from a lender can be emotionally trying for potential homebuyers who were counting on the financing to purchase their dream home. While securing a home loan may seem hopeless after being declined, there are several avenues consumers can take to achieve their dreams of homeownership.
First and foremost, it’s imperative that individuals first learn why they were rejected. Although lenders are required to send disclosure that outline the reasons behind a loan denial, these explanations can be generic and lack the details buyers need to correct their mistakes. Instead of relying solely upon this correspondence, individuals should contact the lender directly to discuss their loan application. A bank may have several reasons for declining a loan, including low credit scores, high debt balances, weak financials or simply an incomplete loan application. Either way, all of these factors can be repaired.
Once buyers are aware of why their application was declined, it can be easier to take steps needed to improve their standing, and submit their application to a new lender. Enrolling in housing counseling can be particularly helpful when submitting a financing request, because professionals can help buyers ensure their application is complete and they meet all the lender’s qualifications. Further, credit counselors are in the unique position to provide tips and guidance on how buyers can improve their credit or financial standing to meet a bank’s criteria.
As a general rule, there are several areas buyers should strive to improve upon before re-submitting an application. The first is their credit score. Lenders rely on consumers’ credit scores to gauge the likelihood that they will default on their mortgage obligations. As a result of the financial crisis, many banks are hesitant to extend loans to borrowers with low credit scores as it may increase a lender’s exposure to risk. For this reason, consumers should work to improve their score by paying all bills on time, eliminating their revolving debt and not opening new accounts.
It’s also important that potential buyers increase their savings to meet a lender’s down payment requirements. Not only will significant savings help buyers qualify for a loan, but a down payment of 20 percent or higher will exempt them from purchasing private mortgage insurance.
After consumers have addressed the concerns that resulted in their initial loan denial, they should seek out other lenders and research their qualifying criteria before re-submitting their mortgage application.