Being turned down by a mortgage lender, especially after preapproval, can be a huge disappointment and cause significant stress—especially if you've already notified your landlord that you'll be moving out in 30 days. If this has happened to you, don't lose hope. There’s a reason for the denial, and there are strategies you can adopt to avoid denial in the future.
Let's explore how often mortgage applications are denied, the common reasons for denial, and your options for improving your credit so you can reapply and ideally secure the home (and loan) of your dreams.
How Often Do Underwriters Deny Loans?
According to the most recent report by the Consumer Financial Protection Bureau, the overall denial rate for home purchase applications in 2021 was 8.3%, which is lower than in 2020 (9.3%) and 2019 (8.9%). The denial rate for Federal Housing Administration (FHA) loan applications was slightly higher at 12.4% in 2021.
Common Reasons Why an Underwriter Might Deny a Loan
While credit issues are a common reason for mortgage denial, other factors can also play a role. Here are seven reasons why your mortgage application might be denied:
Insufficient Credit:
If you lack a significant credit history, lenders may deny your application. Start building your credit history to show lenders that you can responsibly manage and repay debt.
Insufficient Income:
Lenders calculate your debt-to-income (DTI) ratio to ensure you have enough monthly income to cover your mortgage payment and other debts. A high DTI or insufficient income can lead to denial.
Record of Late Payments:
Past late payments on debts like student loans or auto loans can negatively impact your credit report and make lenders hesitant to approve your mortgage.
High Loan-to-Value (LTV) Ratio:
Your LTV ratio compares your mortgage principal to the home’s value. A lower LTV ratio, achieved by a larger down payment, is preferred by lenders.
Recent Job Change:
Stability in income and employment is crucial for lenders. A recent job change can raise concerns about your future income stability.
Unexplained Cash Deposits:
Large recent cash deposits can worry lenders, who may fear the money was gifted and might need to be repaid. Lenders need to verify the source of significant deposits.
Inspection Issues:
Major issues found during a home inspection can lead to loan denial, as lenders view the home as a risky investment.
Should You Be Worried About Underwriting?
Applying for mortgage prequalification can give you a good idea of whether your loan application will be accepted. However, significant changes in your situation between prequalification and closing could result in denial. Stay in close contact with your lender throughout the underwriting process to avoid actions that could negatively affect your loan approval.
What to Do If Your Mortgage Loan Is Denied in Underwriting
If your mortgage is denied, don’t give up. Here are steps you can take to strengthen your application for future attempts:
Talk to Your Lender:
Lenders are required to provide reasons for denial, especially if credit played a role. Use this information to identify and address issues.
Establish Credit History:
If you're a first-time homebuyer, you might need to build sufficient credit history. Consider using secured credit cards, becoming an authorized user on a family member's card, or taking out a credit-builder loan.
Monitor Your Credit:
Regularly check your credit report and score. Stay on top of bills and track your credit utilization to improve your score.
Check for Errors in Your Credit Report:
Dispute any errors or outdated information in your credit report to ensure your score reflects accurate information.
Pay Down and Diversify Debt:
Paying down debts and maintaining a mix of credit types can improve your credit score. Avoid taking on more debt than you can handle.
Keep Accounts Open:
Keep paid-off accounts open to maintain a longer credit history and a variety of credit types.
Increase Your Credit Limits:
After demonstrating responsible credit use, request higher credit limits to improve your credit utilization ratio.
Keep Credit Utilization Low:
Aim to use no more than 30% of your available credit to avoid appearing financially stressed.
Build Your Application Before Reapplying:
Address any issues that led to the initial denial before reapplying. This may take time but will strengthen your application.
The Bottom Line: Don't Worry About Past Denials
A mortgage denial doesn’t leave a permanent mark on your credit report; it shows as a credit inquiry but not as a denial. This means it has a minimal impact on your credit score.
If traditional banks or lenders have denied your loan, consider alternative options with V Nation Corp. Our Home Loan Experts are here to help you navigate the mortgage process and find the best options for your financial situation.
Ready to start your journey toward homeownership? Begin your mortgage application online with V Nation Corp today.
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