A roadblock does not mean the end of home ownership dreams.
You have decided to do it: you are going to take the plunge and buy a house. You apply with a local or online mortgage lender, only to receive a message that your application has been denied. Although it is disappointing, you are not alone. Mortgage rejections happen to a lot of people. The first thing you should do is get up, dust yourself off, and explore your other options.
Find out why
According to the Equal Credit Opportunity Act, if credit played a role in your loan denial, lenders must provide you with a letter with specific details. Here are the top four reasons why loans are turned down:
- No credit: If you’re just starting out, you may not have had enough time to build up enough credit history for a lender to feel confident lending to you.
- Low credit: Your credit score tells the lender how you’ve managed your credit in the past. If your score is low, the lender will worry that you are not paying off a mortgage as promised.
- Job change: Lenders love it when you’ve been in the same job for a while. It gives them confidence that you’re not going to quit your job to join the rodeo the moment you close a house.
- A sudden influx of money: Suppose a lender examines your bank accounts and notices a large unexplained cash deposit. In this case, he naturally begins to think of one of two things: maybe someone lent you some money and you’ll have to pay it back. Or maybe the money is dirty and there will eventually be an episode of Law and Order based on your exploits. The lender wishes to avoid either situation.
Different mortgage lenders have different risk appetites. While one lender may have turned you down, another may find you the “ideal” candidate for a loan. If the reason the first lender turned you down was bad credit, you can apply for a loan from a lender that specializes in low credit mortgages.
However, if your loan application is approved, you can expect to pay a higher interest rate. This is because this lender’s business model is “greater risk for greater reward”. In this case, earning more interest on the loan is the reward.
Just remember that applying for a loan will slightly affect your credit score. When shopping for a mortgage, be sure to apply for all loans for a short period of time (two weeks should be enough). This way the credit bureaus recognize that you’re shopping around for rates and you’ll only be hit once, even if you apply to a dozen different lenders during that window.
Explore owner financing
Ask your real estate agent to help you locate properties offering owner financing. Here’s how it usually works: you pay a deposit and sign a loan agreement (as you would for any property). You make a monthly payment based on the agreed interest rate directly to the owner for a set number of years (usually 5-10). At the end of this fixed period, you have a lump sum payment due. You then refinance the loan with a mortgage lender and pay the balance owing, or sell the property and pay the balance.
Owner-financed homes can be difficult to locate in a hot seller’s market, but it’s an option worth exploring.
Regroup and try again
If an owner financing deal isn’t possible and you can’t find a lender to approve your loan at an interest rate you can afford, it might be time to fix the problem that kept you from getting a loan. get a mortgage.
Maybe you just need to stay in your job a bit longer or provide proof of a source of cash. Or maybe you need to take the time to build up a long enough credit history for lenders to be confident in your ability to repay.
If a low or bad credit score is a problem, here are some steps that can help you increase your score:
- Check your credit reports. One in five Americans who check their reports find at least one error. Even a single mistake can lower your score. Your first step should be to order a free copy of your credit file. You can get one from each of the three major credit bureaus and check them, looking for incorrect information. If you find anything, report it to the agency in question. He then has 30 to 45 days to prove that the information is correct or remove it from your credit file.
- Pay off existing debt. 30% of your credit score is based on the amount you owe to creditors of all kinds.
- Make all your payments on time. Although it will take months to see results, this is the easiest way to boost your credit score.
- Take a secure credit card. Let’s say you want a spending limit of $1,000. You deposit $1,000 on the secured card and borrow against those funds. Like a regular credit card, you make monthly payments that are reported to the credit bureaus.
You might be disappointed to see your mortgage application turned down, but there’s no reason to believe you’ve been defeated. Addressing the root cause of loan denial is the surest way to get back to house hunting.
And when you’re ready to try again, be sure to check out our guide on how to apply for a mortgage.
A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage
Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.
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