Why Was My Loan Denied?

Your Mortgage Application: Approved or Denied?

Each year, thousands of potential homebuyers who apply for a mortgage are told that their loan has been denied. It can be discouraging, especially after submitting paperwork and devoting time to the process but by understanding the reasons why you’re loan was denied, you can prepare to reapply and become approved later on.

There are many reasons why a lender may reject a mortgage application. Here are three:

Reason #1: Your Credit History

Your credit history is one of the main factors that lenders consider to determine the risk of approving you for a loan. If you have red flags on your credit report like foreclosure or bankruptcy filing, you may be denied. Simply having a low credit score or limited credit can also lead to rejection.

It’s important to check your credit score before you apply for a loan to determine where you stand and how you can improve your overall score. The website AnnualCreditReport.com is a good place to start to get more information about your own credit score prior to the mortgage approval process.

If you find any errors in your credit report, it is important to dispute them as soon as you discover them. Fixing your credit score now can save you time and money in the long run, since your credit score may also influence the interest rate that lenders are willing to offer you.

Reason #2: Insufficient Income

If you don’t make enough money or if you have irregular employment, a lender may determine that you are unlikely to be able to afford your mortgage payment. Even if you think you can afford a mortgage, you can be denied if you can’t document adequate income.

In addition to checking your debt to income ratio, lenders will look at the value of any property you currently own as well as other financial assets to assess your ability to pay. If lenders believe you have insufficient assets, you may also be denied a mortgage loan.

You can estimate how much you can afford to borrow with our mortgage affordability calculator.

Reason #3: Your Down Payment is Too Small

Lenders look at down payments as an investment in your future and a measure of your commitment to paying off your loan. If you offer a low down payment, lenders may be wary that your money isn’t where your mouth is and turn you away. Depending upon the type of loan you are seeking, most homebuyers make a down payment that equals 5-20% of the total value of a home.

Tips for Future Mortgage Loan Applications

Ask for Details

If your loan application was denied, ask for information to ensure there were no mistakes and get a full understanding of why your mortgage application was rejected. If you find out there was an error you can easily fix, do so. If not, learn as much as you can about why you were turned down so you can take steps toward getting approved next time.

Manage Your Debt

If you were denied for a mortgage because you have too much debt, try managing your finances by setting up a sound budget, tracking expenses, paying down debt and saving for the future. When you’ve saved enough for a sufficient down payment, you can reapply for a mortgage loan.

Take a look out our mortgage application checklist to discover which documents and information you’ll need to properly apply for a mortgage loan.

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