Many of my readers come across this blog because they’ve just been denied for a mortgage and they need help figuring out what to do next. There is nothing more disappointing than finally being ready to buy a home only to be denied financing by the bank because of a past credit problem.
First of all, don’t feel bad, mortgage lenders turn down 30% of those who apply for a mortgage.
The good news is that most of the time it’s fairly easy to clean up any past credit report messes and be in a position to reapply for the mortgage rather quickly. The key is getting things taken care of as quickly as possible. Here are the five things you need to do when you’re denied a mortgage loan.
1. Find out exactly why you were denied
By law you have the right to know why you were denied the mortgage. The mortgage companies are required to provide you with a denial letter that states the reason why you were denied. If the the denial letter doesn’t go into very much detail, ask the loan officer to provide you with more specific detail.
Unless the loan was denied because of appraisal issues (i.e., the property value doesn’t justify the loan), more than likely you were denied because of either a low credit score or your debt-to-income ratio. These days mortgage companies are pretty lazy when it comes to underwriting, so they’ll basically pull your credit score and if it’s too low, or there are certain negative items on your credit report, you’ll be denied.
If you verify that you were denied because of credit issues you need to find out exactly which negative items are preventing them from issuing you the loan. It’s usually a collection, charge off, or a series of late payments.
2: Make sure your debt-to-income ratio is reasonable
This is pretty straight forward step, but it’s possible that you were denied a mortgage loan because you have too much debt compared to your income. In other words, if you’re strapped down with car loans, credit cards, and student loans, the mortgage lender might determine that a mortgage payment will just be too much for you to handle given your income. The solution here is to simply start paying off debt.
Another way to get around the debt-to-income problem is to put down a larger down payment. However, if you have the money to do that, you might as well start paying off debts instead.
3. Determine if you should apply for an FHA loan
An FHA loan is a mortgage loan available to people with credit scores as low as 580. These loans are insured by the Federal Housing Administration, so you’ll have to pay mortgage insurance to them. You might want to consider applying for an FHA loan if your credit score is lower than 650 or you have a short sale, foreclosure, or bankruptcy. However, there are some general rules when it comes to applying for either a conventional loan or FHA loan when you have one of these negative items.
- Foreclosure: Conventional loan requires a 7 year waiting period. An FHA or VA loan requires a 3 year waiting period.
- Short Sale: Conventional loan requires a 4 year waiting period. An FHA requires a 3 year waiting period. A VA loan requires a one day waiting period.
- Chapter 7 Bankruptcy: Conventional loan requires a 4 year waiting period. An FHA or VA loan requires a 2 year waiting period.
- Chapter 13 Bankruptcy: Conventional loan requires a 2 year waiting period. An FHA loan requires a 1 year waiting period.
4: Remove negative items on your credit report
If you were denied due to negative items such as collections, charge offs, or late payments, you can attempt to get these items removed from your credit report. I have written extensively on this subject so I’m going to link to several articles I’ve written on the subject.
- 3 Ways to Get a Late Payment Removed From Your Credit Report
- 3 Steps to Remove Collections From Your Credit Report
- How to Remove a Charge Off From Your Credit Report
- How to Remove Tax Liens From Your Credit Report
5. Have a professional clean up your credit
Lastly, if you’re the type of person who would rather just get your credit cleaned up quickly and be done with the whole thing, I suggest you check out Lexington Law Credit Repair. They’ll take care of you. Give them a call at 1-844-764-9809 or Check out their website. (They are open on weekends)