What Happens if Your Mortgage Application is Declined?

When you submit a mortgage application, it’s exciting and nerve-wracking all at the same time. Your hopes for the future rest in someone else’s hands, and that’s never easy. If your mortgage application is declined, it can be a very frustrating feeling.

At Divvy, we understand how much it hurts to have your mortgage denied, but we also know that it’s not the end of the story.

In this post, we will explain how you can still have a chance to be a homeowner, even after being declined for a mortgage. 

Step 1: Understand why your mortgage was declined

There are many reasons why a mortgage lender might reject your application for a loan. Before you take any other steps, you should take the time to understand what those reasons were. 

Here are the most common reasons people get declined: 

  • Your credit score was too low: Usually, mortgage lenders require a credit score of at least 620 for conventional mortgages and at least 500 for FHA mortgages. Recently, some lenders have tightened their criteria since the COVID-19 pandemic, raising minimum credit scores to 680 or higher. 
  • Your down payment was too small: For conventional mortgages, lenders require at least 3% down. For FHA mortgages, that number is 3.5%. However, if your credit score is lower, your lender may require a larger down payment. 
  • Income was too low: One of the things a lender looks at is whether you have enough income to pay the mortgage every month. While experts recommend that you shouldn’t pay more than about 33% of your income for housing, lenders will often approve you for a mortgage up to 45% of your income. 
  • Your debt was too high: If you have too much debt, it will impact your ability to pay your mortgage. Lenders usually require that your debt-to-income ratio (DTI) be less than 45%. In other words, all your debt payments, including credit cards and student loans, should be less than 45% of your income. 
  • You had a bankruptcy in the past: Some lenders will not approve your mortgage application if you have a recent bankruptcy on your credit report. 

So, how can you determine which of the factors above got your application rejected? First, you can ask the lender. Whoever you spoke to when submitting your application would be a good place to start. Ask them to highlight the factors that prevented them from extending an offer of credit to you. Lenders have some obligation to tell you if they rejected you for specific reasons, like your credit score. 

Step 2: Learn what you can do about it 

Now that you know the reasons why your mortgage application was rejected, you should figure out if there are steps you can take to resolve them. 

Here are a few solutions to the issues mentioned above:  

  • Fix your credit report: In some cases, your credit report may contain errors. For example, there could be lines of credit that belong to another person with your name. These errors could be affecting your credit score. If this applies to you, read this article on fixing credit report errors
  • Rapid rescore: In some cases, your mortgage lender will actually pay an extra fee on your behalf to quickly get your credit score updated. This process is called “rapid rescore” and is something you can request from your lender. Learn more about this option here
  • Try a different type of mortgage: If you applied for a conventional loan but got rejected, you might still be able to get approved for an FHA loan. These loans have different criteria for approval, including different credit score and down payment thresholds. 

The actions above are ones you can take immediately to see if you are able to get approved for a mortgage right now. There are other options that take a little more time. We’ll discuss those in the next section… 

Step 3: Play the long game

The actions below require a little more time, but they have the power to get you approved for a mortgage and moving into a new home in a few months or a few years. 

  • Pay down credit cards: We know this sounds obvious, but if your mortgage application was declined due to having too much debt, your best option could be to make a plan for paying off your credit cards as quickly as possible. Having less revolving debt will make you more likely to meet the DTI requirements and credit score threshold to get approved on your next application.
  • Student loans: For many college graduates, especially those who are younger, student loans can be a huge hurdle to getting approved for a mortgage. There is no easy way to overcome this, but the solution starts with making a plan to pay off those loans. If you happen to have a high interest rate on your student loans, look into whether you can save money and time by refinancing them. 
  • More credit history: One of the best ways to improve your credit score is simply to show a longer period of time when you’ve consistently paid your payments. Of course, this means you have to wait for time to pass as you build a positive credit history. 
  • Save for a larger down payment: When you apply for a mortgage with a large down payment, it gives you a much better chance to get approved. So there’s no better time to start (or continue) saving than today. Find a few tricks to make sure you save every month, and in a year or maybe even less, you’ll have a much bigger down payment. 

Don’t want to wait to move into a new home? Good news, there are some alternatives to a mortgage that you should look into. 

Step 4: Explore alternatives to a mortgage 

You might look at the solutions mentioned above and say “That’s going to take too long! I need to move into a new house right now.” 

We totally get it. So, what are your options in the meantime? 

There are a few options that could allow you to get into a home now. Below, we’ll discuss Divvy and how our program works. Divvy is not a mortgage, but it is a great option for those who are ready to take the first step toward homeownership. 

If you’ve been declined for a mortgage, here are a few benefits of using Divvy: 

  • You still get to move into the home: Divvy’s program is unique because it’s a hybrid model that combines the benefits of renting and owning. We actually buy the home of your choice and rent it back to you. Which means you can move in soon — as quickly as three weeks from now. 
  • We help you get mortgage-ready: Our mission is to make homeownership accessible to everyone. What that means is we want you to buy the home from us within 3 years of moving in. We’re committed to helping you get approved for a mortgage in that timeframe. 
  • Divvy helps you save for a down payment: One thing that is different about Divvy is we put a portion of your monthly payment into a savings account that you can use to buy the home from us. That’s right — we ensure that you’ll have funds for a down payment! 
  • Get access to a credit counseling program: All of our customers are given access to a nationally-recognized credit counseling service that can help you get your finances back on track so you can improve your credit score. 
  • Have 3 years to apply again for a mortgage: With Divvy, you’re living in the home of your dreams. That takes the urgency out of submitting another application and gives you plenty of time to get all your finances in order so your next mortgage application goes smoothly. Instead of stressing out, you can live in the home while you prepare.  

If you are interested in learning more about our program, you can sign up at DivvyHomes.com and get pre-qualified. Our team will be happy to answer any questions you may have and discuss the details with you.

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