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The home buying process can have a lot of ups and downs. One minute you’re ecstatic about getting an accepted offer; the next, you face complications with the deal. One of the most frustrating complications is a declined mortgage application. While this can be bad news, it doesn’t have to signal the end of your dream to become a homeowner.
Below, we explain why a lender might have declined your application and what you can do next to salvage the situation.
Why Would a Lender Decline My Mortgage?Why Would a Lender Decline My Mortgage?
There are several reasons why a lender might decline your mortgage. Your first step will be to understand the specific reason for your rejection. Once you know that, you can take further steps to ensure your next application is accepted. Here’s a snapshot of the most common reasons for a declined mortgage.
Poor Credit ScorePoor Credit Score
Your credit score is usually the first item a lender will consider in your application. Depending on the loan type, your score may be too low to meet the minimum requirement, in which case you’ll have to either work on improving your score or apply for a different loan type. While it can vary based on the lender, the typical minimum scores for the most popular loan types are:
- VA Loan – No official minimum score, though a score of 620 or higher is typically expected in practice. Some lenders may go lower, but you will likely come under additional financial scrutiny.
- FHA Loan – For a down payment of 3.5%, a minimum score of 580 is required. However, those with a score as low as 500 can still qualify by increasing the down payment to at least 10%.
- USDA Loan – No official minimum score, though in practice, a score of 640 is required by most lenders.
- Conventional loan – 620 for loans backed by Freddie Mac or Fannie May, though some lenders can raise these requirements.
High Debt-to-Income Ratio (DTI)High Debt-to-Income Ratio (DTI)
Your DTI is an essential measure of your borrowing risk. Calculated as a percentage by dividing your total monthly income by your total monthly debt payments. If too high, then you’ll need to work on paying down your current debts. The typical maximum DTI requirements for different mortgage types are:
- VA Loan – 41%
- FHA Loan – 43%
- USDA Loan – 41%
- Conventional loan – 45% (exceptions can be made for DTIs as high as 50%, i.e., a high credit score or lots of cash reserves)
Low Property AppraisalLow Property Appraisal
In a tough market like NYC, where bidding wars can often push sales prices well beyond what a home is worth, buyers must be wary of potential appraisal issues. As part of the underwriting process, your underwriter will order an appraisal to ensure the loan amount matches the home’s actual value. If the appraisal comes back significantly lower than the loan amount, it is unlikely they will accept unless you’re prepared to cover the spread.
You have a few options for how to deal with a low appraisal. You can either pay the difference out of pocket or renegotiate with the seller to lower their price. In some cases, you might be able to request a second appraisal. However, honoring this request is entirely up to the lender and will only be done if they feel the first appraisal was deficient in some way.
You Recently Changed JobsYou Recently Changed Jobs
Lenders like to see applicants with stable jobs. While the definition of a “stable job” can vary from one lender to another, most won’t lend to anyone who’s been in their current job for less than a year. So, if you’ve recently changed careers, now might be a good time to reach out to different lenders and see their requirements.
Most lenders want a stable income going back at least two years. For self-employed borrowers, this can be a tricky requirement. Fortunately, you can take steps to make yourself a more attractive loan candidate.
Issues with the PropertyIssues with the Property
Some loans come with specific requirements about the property. In most cases, these are government-backed loans like FHA or VA loans. The reason for these requirements is that the government wants to ensure that the home is livable. To verify this, the lender will send out inspectors to the property. If it doesn’t meet the loan requirements, you will have to walk away and find another property.
Your Credit Score Recently Went DownYour Credit Score Recently Went Down
A sudden drop in your credit score right before your application can be grounds for rejection. The most common reason your score might have dropped is that you applied for new credit, which usually lowers your score by a few points. If you’re considering applying for new credit, it might be best to wait until your loan is approved. Also, it is recommended not to make any big purchases on your credit cards.
Reasons Your Lender Can’t Deny Your application.Reasons Your Lender Can’t Deny Your application.
While there are many reasons why a lender can reject your application, there are also a few reasons why they can’t reject it. These include:
- Marital Status
- Nation of Origin
It is rare, but if you suspect your application was denied for any of these reasons, you should seek help from the Attorney General’s office.
What Can I Do After My Loan is Rejected?What Can I Do After My Loan is Rejected?
While being declined for a mortgage will not damage your credit score, the hard credit check on your report will leave a mark. If your application is rejected, you can request an explanation from your lender, which they are legally required to give you. Based on this information, you can correct the problem or apply for a new loan with a different lender, and there are also cases where the bank can reject your loan at closing. This usually happens because of a sudden change in circumstances, such as losing your job or taking a big hit on your credit score.
Final ThoughtsFinal Thoughts
Getting a mortgage isn’t always easy. The most common reasons for a rejection tend to be either irregular income or a high DTI. The Home Mortgage Disclosure Act data shows that the denial rate for conventional, single-family loans was about 18.8% in 2019.
Don’t let it dampen your spirits if it happens to you. You can always apply again once you’ve sorted out whatever problems you encountered first.