If You’re Rejected for a Mortgage

If you’re application is rejected, don’t panic. There are many reasons you get rejected for a conforming mortgage:

• Debt-to-income (DTI) ratio is too high – The bank will look at your monthly income in relation to all your monthly debt payments. If your debt—including car payments, mortgage payments, credit card debt, and any others—amounts to more than 45 percent of your pre-tax income, you won’t qualify for a conforming loan.
• Loan-to-Value (LTV) ratio is too high – The LTV is the percentage of the property’s total price that you’re borrowing. So, if you’re financing $180,000 on a house that costs $200,000, your LTV would be 90%. Usually, if you don’t have enough money to put down at least 10% of the price, the LTV will be too high and your loan can be rejected.
• Credit Score too low – Currently, the minimum credit score for an FHA loan is 580 (500 if you can put 10 percent down). Most conforming loans require a minimum score of 620 and 3 percent down. It’s possible for a higher credit score to get rejected as well depending on the amount you’re borrowing and how much you’re putting down.
• Missing or incorrect documents – If you can’t provide all the necessary documentation or some of your documents can’t be verified, you will most likely get rejected for a conforming loan.
• Bankruptcy – If you declared bankruptcy within the last two years, you won’t be able to get a conforming loan.

What to Do if You’re Rejected

A formal application will get a formal rejection letter that explains exactly why you were rejected. You can talk to your agent or mortgage broker about how to proceed. Different lenders have different requirements—smaller, local banks usually have less stringent requirements—so it’s worth reapplying with another bank. However, be aware that another application 30 days later can ding your credit score (although only by about five points).

There are other options to explore as well. You might qualify for non-conforming loans based on your income, you might be able to co-sign a loan with a family member, or see if you qualify for a loan at a different rate. Some options to consider:

• Apply for a non-conforming loan – Consider applying for an FHA loan or, if you qualify, VA or USDA loan. Subprime mortgages should be a last option.
• Apply for a different type loan – It’s possible to qualify for a different type of loan (higher interest rate, adjustable-rate, longer term) if you are rejected for the loan you initially applied for.
• Lower loan amount – If possible, try to borrow less. Save or cash in stock to get more money for the down payment and borrow less than you initially applied for.
• Hit a new credit score benchmark – If you’re close to hitting a new qualifying tier with your credit score, paying off or paying down certain debt, such as credit cards, will boost your credit score.
• Try other lenders – Other lenders have different underwriting policies. For instance, smaller credit unions or local banks may be more lenient with their requirements if you’re a member.
• Co-apply with a family member or spouse – Applying jointly with a spouse or family member (someone you trust completely) means combining your assets and income (as well as debt, so make sure they’re in good standing). The boost in assets could reduce your DTI enough to get approved.