🚫What to Do When the Lender Says “No”
Your Mortgage Loan Was Declined. It happens. It’s a negative topic to write about, but it is something that potential home buyers may face, especially in these days of tighter lending standards. The good news is that it isn’t a final sentence. It’s just a temporary hurdle. Here’s what to do when the lender says “No” to your mortgage application.
There are many reasons why the lender says no to a buyer. Although there are several reasons, the majority of the time the reasons have to do with insufficient credit.
Sometimes the Debt-to-Income Ratio is too high. If someone owes too much of their monthly income on debt, they are more of a credit risk. Lenders have varying DTI limits, but you’ll find that 43 percent is the highest ratio a buyer can have and still get a qualified mortgage. (you can get a rough idea by adding up all your monthly debt payments and dividing that number by your gross monthly income.)
Both of these situations can be fixed. Blair Warner, credit counselor with Upgrade My Credit, and I discuss “What to do when the lender says no,” in the following video:
📋Several Key Points Regarding A Mortgage Decline:
- Most people are surprised that their credit is not sufficient. Many people either don’t look at their credit score at all, or they only give a cursory look. Most often, they are checking their credit on one of the free online resources. While these sites are helpful, they are not as in-depth as what a lender is looking at. Lenders look at the entire credit profile, including credit history, debt-to-income ratio, employment, and other factors.
- Don’t get discouraged. You can spend a few months getting mortgage-ready. When you find out exactly what you can do, whether it is decreasing your debt, or paying off any collections, you can take the steps necessary, and be able to get back to searching for a home. Homeownership is a major life goal for many people. Buying a home is likely the largest financial purchase most people make, so it makes sense that it may take some time to prepare for it. This is why we encourage people to not only get pre-qualified, but pre-approved for a mortgage.
Related: What is Mortgage Pre-Approval vs. Pre-Qualification? via Luke Skar, with Inlanta Mortgage
- Most of the time the debt-to-income problem is due to credit card payments. The good news is that credit cards are the easiest to take care of. However, they need to be taken care of in a strategic way; guidance from a credit counselor or a lender is helpful.
- It’s a good idea to check your credit report and know what your credit and debt situation is before you call a Realtor® or a lender. Know what’s on your credit report. You are able to access a free credit report each year from the top credit reporting agencies: Transunion, Experian, and Equifax.
- If you don’t have enough credit, it can take longer to build it. FICO® Scores are the credit scores used by 90% of lenders to determine your credit risk. The FICO score is based on several things, including your payment history. The longer the history, the better, but you will need at least 12 months of credit payments of some kind. If you don’t have enough credit, you’ll have to establish it and make timely payments to build it up.
Related: What Goes Into a FICO Score?
📂How Underwriting Works
When you get declined by a lender, it doesn’t mean you shouldn’t buy a house, it just means that you don’t fit in the box yet. Working with your lender or a credit counselor can help you get to the place where you meet the criteria and you will fit in the creditworthy box.
The loan officer is the one who packages your loan. The LO knows generally what the underwriter is looking for with each loan product and will collect the necessary paperwork from the borrower. Then they will turn it all over to the underwriter within 72 hours to a week before the scheduled settlement. We like to think of the LO as the salesman for the borrower, packaging their information in the best way possible, and the underwriter as the gatekeeper to the loan.
The underwriter determines whether to approve the loan, decline the loan, or there is a third determination, suspend the loan. In this case, the borrower would be asked to supply additional documents to satisfy the underwriting requirements.
The underwriter generally wants to see the previous 12 months of financial activity. The FICO score also weighs the most recent 12 months more heavily. So, if you are declined for a mortgage, the good news is that you can make the changes necessary to improve your credit-worthiness within 12 months.
Related: What Do Mortgage Underwriters Do? from Colin Robertson, author: The Truth About Mortgage
🚧A Loan Decline is a Detour not the End of the Road
It’s not what you wanted to hear… but it happens. Sometimes it means fixing your credit, sometimes it means you need to lower your debt. Either way, it’s not a final judgement, just a hurdle. Don’t give up!
Sometimes using a credit repair specialist is a good idea. They can help you with a strategy that will repair the right portion of your credit profile in the shortest amount of time. If you need professional credit services, contact Blair Warner – Upgrade My Credit, 817-886-0302, ext. 3
He has been a great help to some of our clients over the years, helping them overcome credit obstacles and get into their dream home.
A note regarding credit “counseling” companies: always use a referral. Some so-called credit counseling companies focus on getting you out of debt but end up hurting your credit while doing so. They withhold credit card payments until the account is three to six months past due. Then, they contact the lender and negotiate to settle the bad debt. That’s how they get negotiated discounts on credit card debt. Card companies don’t settle on your debts when your payments are on time.
You can see why this is a terrible idea. You want to get out of debt, but not at the risk of ruining your credit. The best way to accomplish this is to get on a program to eliminate debt, and clean up your bad credit. If you are looking for a legitimate credit counselor to help you, ask a local lender, or REALTOR® for a referral.
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Chris Highland , Broker eXp Realty – Specializing in Frederick County Real Estate
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