Why Your Mortgage Application Was Rejected, and What to Do After

mortgage loan

With mortgage rates for fixed 30- and 15-year loans still at an all-time low, many aspiring homeowners are making their dreams of buying a house a reality.

At about 3% interest rate, the purchase of real estate has become more affordable for a lot of people.

That is why, right now, many households are searching for the best mortgage rates around and sending in their application in the hopes that they can take advantage of the situation and buy their dream homes. However, submitting all the requirements would not guarantee that your request for a home loan will be approved. There is a chance that your application will be rejected.

Here are the common reasons why mortgage applications are rejected.

Murky Credit History

When you apply for any kind of loan, part of the requirements is for the lender to peep into the credit score of the borrower. The aim is to guarantee that the borrower will be able to pay the agreed monthly due on time and without any problems.

If the borrower’s credit history is clean, the loan will likely be approved. They may even get more options and better deals. However, if your credit score is too low, it might make the lender question whether to grant your request for a home loan or not.

Credit scores are not permanent, but one bad decision can severely affect it. Repeated late payments of credit card bills will have a negative impact on your score. Filing for bankruptcy, defaulting on a loan, and foreclosures will also be reflected in your score.

Ideally, a score of about 800 will be treated as a positive sign, a good recommendation by lenders. However, if your score goes down to below 600, lenders may look at it as a red flag.

A low credit score is one of the most common reasons why their applications are rejected. Many do not know their credit score in the first place.

Before you start the process of getting a mortgage, you should order a copy of each of your three credit reports. That way, you can check if there are any errors that may prevent you from getting a loan.

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Large Deposits from Unknown Sources

If you keep depositing large amounts of sums into your savings or checking accounts, the lender may think it suspicious.

Gift funds, which are money given to you by family or friends for whatever purpose, need to be documented. There should be a gift letter enclosed to explain the deposit. Otherwise, the lender may think that the money was another loan that you will need to repay later on. If it is a loan, the lender will have to include it in the calculation of the borrower’s monthly obligations.

In case you receive money as a gift, try not to deposit it to your account with your paycheck at the same time. This will make it easier for you and the lender to discern how much the gift was.

High Debt-to-Income Ratio

The lender will also want proof of income before they make a decision. They want to make sure that you are capable of paying off your debt on time.

A debt-to-income ratio that reaches 50% is a bad sign and may cause a rejection. Aim for 40% or better.

What to Do After Rejection

In case you receive a rejection, ask the lender for an explanation. They will be willing to tell you why your application was denied.

Once you know, you can take steps to correct the issue. Errors in your credit report can be amended. You can also get a co-signer, who has a higher income and better credit score, to back you up.

A rejected from a lender does not mean you will never be granted a mortgage. Take your financial profile elsewhere and keep applying. Try approaching credit unions and checking online lenders. Eventually, you will find a lender who will trust you with the money you need to buy your dream house.


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