If you’re like most people who want to buy a home, you’re going to need a mortgage loan – but lenders don’t just hand out cash to anyone who asks. In fact, many people who apply for mortgages get turned down.
But nobody likes to hear “No” from a lender.
Fortunately, if you get turned down for a mortgage, there are a few things you might be able to do to get back on track.
What to Do if You’re Turned Down for a Mortgage Loan
First things first: You’ll have to determine why the lender rejected your mortgage application so you can take the appropriate steps to get things moving again. Some of the most common reasons people are turned down for mortgages include:
- Having a too-low credit score
- Having a poor debt-to-income ratio
- Not having a large enough down payment
Let’s explore each of these and what you can do to make things right.
What to Do if Your Mortgage is Turned Down Because of Your Credit Score
Mortgage lenders put a lot of stock in credit scores. They have to, because your credit score is one of the only ways that a lender can see whether you’re likely to pay back a loan (especially one as big as a mortgage).
While people with the highest credit scores qualify for the best interest rates and loan terms, some people don’t qualify at all.
A perfect credit score is 850, but very few people actually reach that. In order to qualify for a conventional loan, your credit score needs to be at or above 620 (except for some types of FHA loans and VA loans).
If a lender says your credit score is too low, it’s time to check your credit report for errors. Thanks to the Federal Trade Commission, everyone is entitled to a free copy of his or her report from each of the reporting bureaus every year. (Here’s how to get yours.)
If there are errors on your report, which is actually pretty common, dispute them.
If there aren’t any errors, you’ll have to take the appropriate steps to repair your credit. That might include paying off credit card bills and keeping your account balances low.
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What to Do if Your Mortgage is Turned Down Because of Your Debt-to-Income Ratio
Lenders look at how much you owe versus how much you make, and they call that your “debt-to-income ratio,” or DTI. Your DTI needs to fall within a certain range in order for lenders to feel like you’re capable of repaying a loan, so it’s important that you pay down your debt as best you can in order to get a favorable decision from a mortgage lender.
Most lenders typically allow a maximum debt-to-income ratio of about 43 percent (some allow up to 50 percent). But the lower it is, the better – lenders really want to see that number in the 30s. What that means is that you’re spending that percentage of your income on debt.
What to Do if Your Mortgage is Turned Down Because You Don’t Have a Big Enough Down Payment
Other than saving for a down payment, there isn’t a whole lot you can do if a lender turns you down for this reason. You can ask family members for a gift (but talk to your lender about the requirements for a down payment gift, because they’re pretty strict).
You can also try to apply for a different loan product – one that doesn’t require such a high down payment.
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