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One in eight mortgage applicants gets turned down.
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Overcoming a mortgage application rejection is a matter of learning what lenders look for in a borrower.
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Your credit history, employment and other factors weigh heavily in the decision to approve your home loan.
A mortgage is the most significant investment that the average American will make in their lifetime. The reasons mortgage applications get rejected vary — but there are ways to overcome this hurdle.
The path to becoming a homeowner begins with the dreaded mortgage application process, interview and lender evaluation.
According to Federal Reserve data, about 12 million people applied for mortgages in 2017.
Of that 12 million, 7.3 million were formally approved for loan origination and another 2.1 million resulted in outright purchased loans.
“Loan origination” refers to the complete process whereupon a mortgage application is approved, processed and then funded.
A “purchased loan” means that the real estate broker funded the loan itself, using its own resources rather than shopping it to a bank.
About 88% of all mortgage applications in the United States are approved through origination. According to a Federal Reserve study, about 12% of all mortgage applications are rejected.
That means about one out of every eight prospective home buyers is rejected for one reason or another.
If you are rejected for a mortgage application, you shouldn’t lose hope. Learn from your mistakes, improve your application techniques and try again.
A mortgage application is a big deal and a complex process. Chances are, if you are rejected for a mortgage application it wasn’t for one reason.
The reasons mortgage applications get rejected
Four reasons mortgage applications get rejected include but are not limited to:
- Credit history problems
- Debt and past bankruptcy issues
- Inconsistent lengths of employment
- Insufficient down payment
You should ask why your mortgage application was rejected to improve your chances of approval in the future.
That being said, one of most-cited reasons mortgage applications get rejected is the poor credit history and corresponding credit score of the applicant.
Credit history problems
Bad spending habits can adversely affect your ability to get some kinds of employment, loans and, yes, a mortgage approval.
The main barometer of risk that a mortgage lender will check against your application is your credit history and credit score.
A FICO credit score is a predictive analysis that calculates the risk probability associated with giving someone a credit card.
FICO credit card scores range between the worst, 300, to the best, 850. Your credit score needs to be at least 640 for most mortgage lenders to even look at your application, much less approve.
The best way to take care of your credit score is to only use credit cards if you can afford them. Always pay down your outstanding balances in full and before they are due.
Your lifetime use of credit cards is recorded on your credit history. A long history of credit card payment delinquencies or late payments will not reflect well against your mortgage application.
According to research conducted by the Consumer Financial Protection Bureau, about one out of every five Americans have no credit score or history.
That corresponds to about 26 million Americans being invisible to lenders. Another 19 million Americans have such lacking credit histories that they are essentially unscorable.
Debt and past bankruptcy issues
Your potential mortgage lender will check your credit history to look for outstanding debt, declarations of bankruptcy and attempts at debt collection.
Positive and negative information will remain on your credit history for months or years. Significant debts and bankruptcies are among the big reasons mortgage applications get rejected.
Hard inquiries with bad credit scores can stay on your history for a few months up to two years.
Likewise, constant late payments and notices of debt collection can stay on your credit history for seven years or more.
Personal filings of bankruptcy and unpaid tax liens can remain on your credit report for a decade or more. Also, just because they have been erased from your credit report doesn’t mean they can’t be unearthed by a mortgage lender.
It can take seven years and up to a decade for bankruptcies, collection notices, chronic late payments and tax liens to be deleted from your credit history.
Continued irresponsible credit card use and bad borrowing behavior only extends the life of such information on your credit report.
Inconsistent lengths of employment
A mortgage lender wants to see that as an applicant you are a stable and risk-free approval.
Your chances for approval fall considerably if you are the kind of person who switches jobs every few months or every year.
To a mortgage lender, employer-hopping means that you don’t have access to steady pay and are not reliable.
If you can’t stay gainfully employed for more than a few months at a time, how can you be financially responsible enough to pay off a mortgage for 30 years?
Make sure that you have been working for the same employer for two years or more before you apply for a mortgage.
Unsteady work is one of the reasons mortgage applications get rejected.
Also know that your level of educational attainment can foretell how much unemployment you may experience in life.
According to the Bureau of Labor Statistics, high school dropouts experience at least 7.7 incidents of unemployment from age 18 to 48.
High school graduates are unemployed at least five times throughout that age range. College graduates experience about four bouts of unemployment in that time.
About a third of all high school dropouts have at least 10 incidents of employment from age 18 to 48.
Insufficient down payment
Most mortgages require anywhere from a 5% to 25% down payment equivalent to the overall value of the home.
In 2017 the average mortgage applicant paid a down payment of at least 10%. More than 60% of all first time buyers paid about a 6% down payment.
The average down payment for a mortgage was at least $50,000.
If possible, you can arrangement for someone to co-sign your mortgage. However, that person will be on the hook if you can’t keep up with payments.
If you can’t pay the down payment for a mortgage, your best course of action is to delay the application. Take some time to save more money to make the down payment later on.
I’ve been rejected, now what?
If you have been rejected for a mortgage, there are a few things that you can do.
First, ask why your application was rejected. Accept that it may take time before you become approved.
Still, there are some things that you can do in the meantime to overcome the reasons mortgage applications get rejected.
Get your credit reports: You are entitled to a free annual credit report concerning your score.
Your credit card, borrowing and loan activity is automatically reported to three credit score issuing bureaus, Equifax, Experian and TransUnion.
Carefully check over your credit reports and report any mistakes that you may come across. About one in four people find errors in their credit reports that lowered their credit scores.
Having a “prime” credit score of 760 or better can potentially save you more than $32,000 in interest payments over the life of a 30-year mortgage.
Avoid opening too many credit cards: If you have a bad credit score, you will face a penalty for inquiring and applying for too many credit cards.
They are called “hard inquiries” or “hard checks.” Each time you apply for new credit, especially if you have a bad credit score, it will be recorded on your credit history.
Such behavior looks suspicious to credit score issuers, credit card companies and lenders. Your credit score could be penalized by as much as 5 to 10 points per hard inquiry.
If you must apply for new credit, seek no-credit check “soft inquiry” credit card offers. Such offers check your basic information and are not recorded on credit histories.
Be wary of co-signing: When you co-sign for someone’s else ability to pay a debt, you become the default debt owner. If the person you are co-signing for can’t live up to their responsibility, it will become your responsibility.
Through no fault of your own, your credit score and history can be affected.
When you co-sign for a loan, you are willingly taking a financial risk that professional lenders already have balked at.
About 28% of people who cosigned a loan saw their own credit scores significantly lowered. Another 38% ended up paying for the co-signed debt in part or in full.
Only co-sign for people you know are responsible and will pay down their debts. Better yet, gift the money outright if you want to help.
Don’t cancel old credit cards: When you cancel old credit cards you wipe away credit history. Your oldest credit card represents the beginning of your credit history.
If you cancel it, your credit history will be gone and look painfully truncated to potential mortgage lenders.
Lower your debt-to-income ratio: Your debt-to-income (DTI) ratio represent how much income you bring in each month in comparison to ongoing debt.
For instance, if you make $6,000 a month in salary but pay $3,300 a month in debt, then you have a DTI of 55%.
If you pay more in debt than you make in salary every month, how can you pay for a mortgage? How to explain such to a mortgage lender?
Most mortgage lenders prefer to see a DTI of 40% or less when approving mortgage applications.
Apply for an FHA loan: A Federal Housing Authority (FHA) loan is a privately issued loan in which the government acts as an insurer or cosigner.
FHA loans were created in the era of the Great Depression when home ownership was impossible for most Americans.
You can qualify with bad credit, there is no income requirement and you can pay as low as 3.5% as a down payment. Qualifying isn’t a slam dunk, but an FHA loan might be your best option against rejection.
No one likes rejection. Especially when applying for a mortgage.
Still, the process of learning from a mortgage application rejection can be an invaluable experience. Instead of rueing the rejection result or overall experience, you can discern what you need to do to become approved next time.
Overcoming the reasons mortgage applications get rejected
It might behoove you to wait a year, or even two, and then apply again for a mortgage.
Take the time to rehabilitate your credit score if necessary. Apply for new credit and dutifully pay down the debt on time. Save money.
Such activity will display your patience and financial responsibility to a mortgage lender.
There is not much that you can do to change things once your mortgage has been rejected. All you can really do is change and improve the behavior that resulted in the rejection in the first place.
A mortgage is an investment for a lifetime. Perhaps the first and last major investment you will ever assume. There is no reason to rush things.
Big things take time. Patience is the key to success. Meanwhile, look at a mortgage rejection as a empowering step on the way to approval.
