Denied pre-approval? Here’s what to do
All rejections hurt. But when it is your new home mortgage application, the pain runs deep.
Mortgage pre-approval makes the initial home buying experience smooth. The majority of home buyers apply for pre-approval.
But you might not know this: most of them get rejected.
So a rejection should not be the end of your new homeownership dream. Lenders have many reasons to deny a mortgage pre-approval. You must ask why your application was rejected to prepare yourself for getting pre-approved the next time.
These are the top five things you must do after getting denied:
1. Ask the lender
Most mortgage lenders will be forthright about why your application was not approved. They will provide reasons for the rejection along with advice on how to proceed. The Equal Credit Opportunity Act entitled you to a response from the lender, but you must ask within 60 days of receiving a rejected application.
Common reasons cited include low credit score, negative items on your credit report, not meeting the lender’s debt-to-income (DTI) ratio, not disclosing complete financial information, etc.
2. Improve your credit score
If your pre-approval is denied for a low credit score, take the necessary steps to improve the score. It is one of the determining factors for low mortgage rates.
According to Michelle Chmelar, vice president of mortgage lending firm Guaranteed Rate, the credit score is “one of the most important parts to qualify, but it is a part. You have to have the whole package: income, sufficient assets, and credit.”
Two steps to boost your score:
- Pay off debt, especially any credit card debt, which is an unsecured loan and has a significant bearing on your credit score.
- For the next six to 12 months, pay your bills on time.
3. Rectify credit report errors
Your loan approval gets severely hit by negative items on your credit report. If this is why your loan was denied, it’s time to review your credit report. It may contain errors, and you’ll want to deal with those ASAP.
First, verify and confirm the accounts listed in the report are yours, and that the associated data is correct. In the case of any errors, you can dispute inaccurate information with credit bureaus free of cost.
4. Monitor your debt-to-income ratio
Most pre-approvals are denied due to an applicant not meeting the lender’s debt-to-income (DTI) ratio. Lenders use DTI to assess your repaying ability. The higher the DTI, the lower is your chance for pre-approval.
Generally, lenders prefer a DTI ratio of 36% or less. It is calculated by dividing your current monthly debt by your monthly gross income. For example, if your debt is $4000 per month and your monthly gross income is $5000, the DTI ratio would be 80% ($4000/$5000). Not a winning combo.
Increase your monthly income to reach a better DTI ratio.
5. Put aside savings for a higher down payment
One reason for pre-approval denial could be that you’re simply applying for too much money, which lenders may perceive as a risk. You can minimize the risk and increase your chances of pre-approval by putting up a substantial amount as a down payment and requesting a smaller loan amount.
But remember: making a high down payment is a long-term strategy. So, focus on shoring up your savings to get there.
Any mistakes are in your past
If you’ve had your mortgage pre-approval denied, don’t waste time dwelling on all the things you could’ve done. (Hey, each of us has blemishes in our financial pasts.) But your attention should be focused on the future: both the short- and long-term.
The next six to 12 months are for course-correction. After that, it’s all about choosing a loan that works for you for a period of 15 or 30 years. Use the insights above to strengthen your application the second time and put yourself on track for securing an ideal home loan.