What To Do If You’re Turned Down for a Mortgage

Being denied a home loan is disappointing, but it doesn’t mean you’ll never be a homeowner. It just means you need to make your financial landscape more appealing to lenders. 

Not sure what comes next? This blog takes a closer look at what to do if you’re turned down for a mortgage. 

4 reasons for mortgage denial

Lenders deny mortgages when they aren’t confident in your ability to repay the loan. The most common reasons for mortgage denial include:

1. High Debt-to-Income: You carry substantial debt compared to your income, which can make it harder to afford an additional monthly payment. 
2. Low or Unclear Income: You make too little compared the monthly mortgage payment, or can’t prove a consistent income. (Ex: you freelance or just switched jobs.)
3. Poor or No Credit History: You have negative marks on your credit report, a young credit history, or no credit at all. 

Learn more: What Credit Score is Needed to Buy a House?

Does being denied a mortgage hurt your credit?

Having your mortgage application denied doesn’t hurt your credit. But a “hard inquiry” gets added to your report when a potential lender checks your credit. Hard inquiries can cause your credit to dip, whether or not you were improved for the loan. Your score should bounce back in a few months – meanwhile, you can work on improving your approval odds for next time.

What happens if you get turned down for a mortgage? 

Getting denied a home loan is disappointing, but you won’t be penalized for it. You just have some work to do to make yourself more attractive to lenders. Here’s what to do if you get turned down for a mortgage. 

1. Get clear on why you were denied

Lenders reject credit requests for many reasons; so contact your loan underwriter and ask why you were denied. This information can help you understand what you should do next, whether that’s improving your score, saving up a larger down payment, or looking for property in a lower price-range. 

Do lenders have to tell you why you were denied? 

Under the Equal Credit Opportunity Act, you have the right to know why your credit application was denied. As long as you request this information within 60 days, your lender must provide a specific reason for your rejection. 

Learn More: Protect yourself by understanding consumer credit laws 

2. Start optimizing your credit history 

If you were denied because of your credit history, take steps to improve the specific things working against you. Some factors, like your debt-to-credit ratio, can be tackled pretty quickly. Others, like a history of late and missed payments, require more time and effort to counterbalance.

Take a look at your credit report, and read up on how to build credit to buy a house.  

What factors affect your credit score?

Each credit bureau uses slightly different scoring methods, but there are five main factors that affect your credit score: payment history; amounts owed; credit age; credit mix; and new credit. Payment history and amounts owed (also known as debt-to-credit ratio or credit utilization) have the largest impact. 

3. Keep saving while paying down debt

Lenders like to see low debt and sizeable down payments when they’re approving a mortgage. While you work to improve your credit, take steps to pay down your debts and save money.

It’s not always easy to do both, this blog on saving vs. paying debt can help you develop a strategy that’s best for your personal situation. 

4. Look for innovative solutions

It’s tough to know what to do if you get turned down for a mortgage. You may feel like you’ve been told your dreams are out of reach. But mortgage denial just means “not right now.” There are ways to improve your odds next time. 

Educate yourself and look for things you missed the first time around. Different mortgage types have different minimum credit requirements.

Many banks and community organizations offer financial education classes for aspiring homeowners. And innovative solutions like StellarFi allow you to use your existing expenses to build credit. 

The bills you pay should pay you back

One of the best things you can do if you get turned down for a mortgage is to start building your credit. With StellarFi, you can improve your credit history with your rent, car payment, and even your Disney+ subscription.

It’s simple: just link your bills and Stellar reports your positive payment history to the major credit bureaus: Experian®, TransUnion®, and Equifax®. Take a look around, and put credit-building on autopilot today.