When you're ready to buy a house the last thing you want to hear is that your mortgage loan application was denied. Rest assured, you're not the only one. According to the Federal Bureau of Consumer Financial Protection, 1 in 9 loan applications to buy a house were denied. Let's look at some reasons why your application may have been denied and what to do about it.
- Bad credit/no credit
- Background check
- Borrowing history
- Repaying existing loans
- Accounts in collections
- Recently opened a line of credit
- Recent job change
- Large amount of money received for a down payment
- Incomplete or incorrect information on application
- Address is a P.O. box or frequent address changes
One of the most common reasons loan applications are denied is bad credit. If your score is under 499, you will most likely be denied. According to Experian, even a score is between 500-600 may result in a denial or you may be required to pay a larger down payment.
If you don't have credit, that's a problem too. It's hard to prove that you will be able to pay off a mortgage if you have no credit history. Talk to your lender about signing up for a credit card and making small purchases that you pay off each month. Soon you'll have proof of your ability to consistently make payments.
Background & Repayment History
Your background and repayment history will also be considered. If you have a history of late payments for recurring bills (ex. electric bill or another loan), your credit report and score will be negatively affected. This makes up 35% of your credit score so if you've got a poor history now is the time to improve it by paying off outstanding bills and paying on time in the future.
If you have an account in collections this may be a red flag for lenders too. Although, if you have proof of consistent, on-time monthly payments over the past year, many lenders will not consider the collection a mark against your application.
Opening a New Line of Credit
Even if you were previously pre-approved for a mortgage loan, you can still be denied a loan. If you recently opened a line of credit, for a new vehicle for example, lenders will see a red flag. Even something as simple as opening a new credit card, after being pre-approved, can result in a declined application.
By not maintaining consistent employment, lenders consider you a higher risk. If you've recently changed jobs or are between jobs, your lender will stop and investigate. Lenders want to see a history of steady employment over the last 2 years. When you want to buy a house, it's best to have at least a 2 year history of work including no more than 3 jobs during that period and no time off in between jobs.
Large Bank Deposits
If you've received a large sum of money recently, whether it's for your down payment or something else, better have a paper trail. In other words, large sums of money dropped into your bank account puts lenders on high alert. Get a letter from the person who gave you the money and what it's for, to save yourself from being rejected for a home loan.
Incomplete or Inaccurate Application
When it comes to your loan application, be honest and fill in all portions. Leave something out or forget a "0" and the mistakes will be held against you. Lenders are suspicious when information isn't provided on the form. They will find whatever it is you're withholding so if you owe money to the IRS, for example, it's best to let them know on the application.
Change of Address
Lastly, if you change your address frequently or use a P.O. box as your address, you are lowering your chances of getting approved for a loan. This is considered suspicious activity and lenders may hold it against you.
What Can You Do?
If you've been denied a mortgage loan, ask the lender why you were denied. Submit a written request to receive a copy of the credit report that resulted in the denial. When you know the reason(s) you were denied, you can take steps to improve your financial situation. Hold onto your job, get a second job if you need more money to pay down debt, take steps to improve your credit score, etc., to position yourself for approval in the future. After you've worked to fix the flagged issues, it's best to wait a year before reapplying to reduce the chances of being rejected again.