What To Do If Your Mortgage Application Is Declined

The economic uncertainty caused by the pandemic has made it tough to get a mortgage, but even if you’ve already been turned down, it’s possible to re-apply and get approved.

"Even as the economic recovery is underway, overall credit supply has remained close to its lowest levels since 2014,” said Joel Kan, an associate vice president for the Mortgage Bankers Association.

Tighter lending standards mean some consumers are being turned down for mortgages for issues that can be remedied.

Some of the most common reasons a mortgage application is declined are due to negative items on a credit report, insufficient income, or too many outstanding debts, said Doug Leever, a mortgage sales manager at Tropical Financial Credit Union in Miramar, Florida.

“A good loan officer will listen with empathy to a borrower’s situation and advise them on ways they can improve their current financial or credit problems before re-applying,” he said.

One reason a mortgage could be denied is if the assets cited in the application are not sufficiently verified or the amount is not high enough to cover the down payment and possible needed reserves, said Craig Garcia, president of Capital Partners Mortgage in Coral Springs, Florida.

It’s important to respond immediately to any request from a mortgage processor for paperwork verifying items on your application. If the cash reserves are not enough, you may have to save additional funds before re-applying.

How to improve your credit score

Another reason could be problems with your credit report. If there are errors, dispute the items with each of the three major credit bureaus: Equifax, Experian and TransUnion.

The part of the credit score that can fluctuate the most in the short term is often the amount of revolving debt such as credit cards, Garcia said.

“Paying down revolving debt can be one of the ways to quickly improve a credit score,” he said.

It can take several months before you see an improvement in your credit score if the amount of debt you have is high, he said.

Consumers should attempt to pay down your credit card balances to less than 30% of the limit since this factor makes up about a third of your credit score, said Bob Tait, a loan originator with Motto Mortgage Elite Services in Perkasie, Pennsylvania.

“Think of your credit as a muscle,” Tait said. “When you use it, the muscle gets stronger, when you abuse it, the muscle gets weaker. Use your credit wisely, keep your balances low, make all your payments on time, even if you make the minimum payment.”

A huge aspect of any credit score is your housing history, said Sterling Smith, branch manager at First Community Mortgage in Shelbyville, Tennessee.

“Late mortgage payments in the past have a strong negative impact on your credit score,” he said. “Any sort of collections or bankruptcies have a strong influence on your credit score and your ability to get a mortgage.”

How long before you re-apply?

Depending on why your mortgage was denied, you could try making an offer for a house again in as soon as a few weeks or as long as several months or years.

Get a second opinion if the reason for the decline does not sound reasonable to you, said Garcia, of Capital Partners Mortgage.

“Different lenders may look at the same information differently or have different lending appetites or loan programs,” he said. “Just because one lender says no, doesn’t mean another lender will not say yes.

If your loan was not approved due to credit or income issues, the loan officer typically would counsel the applicant on what they need to do to improve their credit and rework the loan if needed, said Leever, of Tropical Financial Credit Union.

“The time frame all depends on how long it takes the borrower to improve their financial situation,” Leever said.

In some cases, even after being pre-approved there are reasons why a deal could get killed that have nothing to do with the application.

One common reason in a market where prices are going up rapidly is that the appraisal of the home is lower than what the borrower has contracted to pay, Leever said. If the buyer can’t come up with cash to make up the difference between what the appraiser is saying and what the buyer is demanding, the mortgage might not go through.

Or, there could be liens on the property, such as outstanding issues with the condo association, that the seller needs to resolve.

When you make an offer on a home, you are required to make an earnest payment that is a few thousand dollars. If your mortgage is denied, the deposit is often returned if there’s a mortgage contingency included in the deal, said Smith, of First Community Mortgage.

“As long as there is a mortgage contingency in your contract, you should get your earnest money back if you fail financing with your lender,” Smith said.