Denied! What to Do When Your Lender Says No

BY Ori Zohar

Even with the best-laid plans, applying for a mortgage is never a sure thing. According to the Mortgage Bankers Association, about 30 percent of the people who apply for a mortgage get turned down. Trying to refinance? It’s even tougher – about half of all those applications get kicked to the curb. So maybe it’s not rare, but it’s cold comfort to know you’re not alone when your lender says no. After all, you’ve been counting on that mortgage. Does this mean you’re out of luck?

Happily, the answer is also a resounding “no.” Just because one application is denied doesn’t mean the next one will be – especially if you find out why you were turned down (if you don’t know, ask!) and take steps to address the issue.

Here’s a look at the top three reasons mortgage applications get rejected, and what you can do about it.

1. Poor credit history

A rocky credit report is one of the top reasons a mortgage isn’t green-lit. The two big things that alarm lenders: a low score, and serious adverse credit events such as foreclosures, short sales, and bankruptcies.

What you can do if:  Your score was too low

  • Consider an FHA loan.The FHA guidelines permit financing with scores as low as 580, so if you’ve been denied a conventional mortgage, think about applying for an FHA loan instead.
  • Work to improve your score.First and foremost, scrutinize a copy of your credit report (which will be sent to you by your lender) and ensure there are no errors. Next, roll up your sleeves and get ready for a little work. Payment history makes up 35 percent of the FICO credit score used by mortgage lenders. While it’s not easy to gain ground here, you can start by paying off some debt, keeping your revolving-account balances low, making all your payments on time, and getting (and staying) current on any missed payments.

Seeing an improvement in your score could take 30 to 90 days, but even a modest increase can make it easier for you to secure a mortgage. Alternatively, you could ask your lender for a “rapid rescore,” which will return a new score within a few days of changes being made.

What you can do if: You’ve had a past short sale, foreclosure, or bankruptcy

  • If you had a foreclosure or deed in lieu of foreclosure: Conventional loans usually require a seven-year waiting period. Both FHA loans and VA loans require three years. If you applied for a conventional mortgage, consider checking out FHA or VA programs instead. And if the loss of your previous home was due to circumstances beyond your control, you may qualify for the FHA Back to Work Program, which could allow you to buy a home just one year after a triggering event. 
  • If you had a short sale: Conventional loans require four years for short sales. For FHA loans it’s three years; for VA loans it’s one day. 
  • If you’ve had a Chapter 7 bankruptcy: Conventional mortgages usually require that you wait four years to obtain financing, but the FHA and VA ask for just two. If you’ve tried the conventional route, explore these programs instead. (The FHA’s Back to Work Program also applies to bankruptcies, so it’s worth checking out.) 
  • If you’ve had a Chapter 13 bankruptcy: It usually takes two years after a Chapter 13 discharge to qualify for a conventional loan. Once again, FHA and VA loans are more lenient – with a good payment history, the wait time can be just a year after discharge – and could prove a more successful option for you.
  • Wait it out. If all else fails, time can be your best ally. Applying after your lender’s waiting period is over can increase the odds that your application will be approved.

2. Insufficient or undocumented income

Before you apply for a mortgage, your loan officer should examine your gross monthly income to make sure you can meet your current monthly payment obligations along with your future mortgage payment. So assuming that happened, why didn’t your income meet underwriting requirements?

It could be that some of the income you listed couldn’t be backed up by the documentation you provided, or perhaps your tax returns showed a business loss for self-employment income – that amount would come off your gross monthly income.

What you can do if:  Your gross monthly income is too low

  • Borrow less. You can apply for a lesser mortgage amount. Alternatively, you can consider loan programs for low- to moderate-income borrowers with lower down payment requirements – for example, FHA or VA loans.
  • Bump up your down payment. Increasing the amount of money you put down will lower the total mortgage loan amount. If you don’t have the cash on hand to do so, a down payment assistance program might be available to help you out, or you could consider tapping a 401(k) or asking for a cash gift from a relative.
  • Improve your debt-to-income ratio. If you pay off some existing monthly debt obligations, that will improve your debt-to-income ratio and free up more of your monthly income to apply toward a mortgage payment.

3. Lack of cash reserves

Cash reserves are how much money you’d have left over after you make your down payment and pay for closing costs. Generally, cash reserves are measured by the number of months you can make your PITI payments (principal, interest, taxes, and insurance) after close of escrow.

Every lender has its own threshold for what’s considered to be a sufficient cash reserve for a loan applicant; conventional mortgages can range from two months to as much as 12 months. (Jumbo loans might require a couple of years of reserves – or more.)

What you can do if: Your cash reserve is too low

  • Include your securities. Stocks, bonds, mutual funds and retirement funds can all be counted towards your cash reserves. Just beware that not all cash is created equal – stocks, bonds and mutual funds are often calculated at a discounted rate of 70 percent of their vested value, and retirement funds are commonly calculated at 60 percent of their vested value.
  • Wait for seasoning. If you add cash into your bank account to count towards your reserves, it’s important for these funds to be in the bank for a certain amount of time to meet lender scrutiny. After that time period, it’s considered to be “seasoned.” Two months’ bank statements not reflecting any large deposits is sufficient for seasoning.

The important thing to keep in mind if you’ve been denied for a loan is that there’s still hope. For personalized advice, reach out to a Sindeo mortgage advisor at (855) 746-3361.