What to Do If Your Home Loan Application Gets Rejected

Receiving a rejection for your home loan application is a brutal punch to the gut. But does that mean you should hit the brakes on your home-buying plans for now? Not necessarily. A rejection from one mortgage company doesn’t mean you can’t get approval from another. So if your home loan gets rejected, here’s what you can do next:

Find out why you were rejected

The first thing you need to do is to find out why you were rejected. This is not only to ensure that you were not rejected unfairly, but it’s also to identify the area/s you need to work on.

Let’s take a look at some of the most common reasons why home loans get rejected:

Insufficient income.

Your income determines your buying capacity and your ability to pay back the loan. If a lender sees that your income is not enough to support the mortgage and your basic needs, they will see it as grounds to reject your application.

Credit report defaults.

If you have overdue payments of more than 60 days on your credit report, it can be the reason (or one of the reasons) why you were rejected. In the eyes of a lender, credit report defaults might mean that you are a bad payer, and therefore a risky borrower.

High debt-to-income ratio.

Your lender will also look at your other debts to assess you as a borrower. The higher your debt-to-income ratio is, the lower chances you have of getting approved for a home loan.

Inadequate deposit

Applying for a home loan without meeting your lender’s loan-to-value (LVR) requirement is a sure way to get rejected. If you don’t have enough funds to pay at least the minimum (usually 20%), there’s a good chance that you won’t get approved.

Inaccurate information

Errors on your application form can lead to a rejection, no matter how small the mistake might be. In this case, the fix can be as simple as sending another application.

Poor savings history

Lenders also look at your savings history to determine your level of financial responsibility. If you neglect your savings account, it can contribute to your home loan application’s rejection.

Lenders typically send a notice of adverse action stating the reason for your denial and the information that was used as the basis for it. Ensure that you read this notice and dispute any inaccuracies that you might find.

man handing a toy house

Fix the reason for denial

Now that you know why your home loan application was denied, you can increase your chances of getting approved next time around by fixing the denial cause. For example:

Increase your income

If your income was the problem, increase your income or apply for a lower-priced house.

Reduce your debts

Lenders don’t like it when you have a lot of other debts to pay. Hence, it’s a good idea to downsize your debt by paying off outstanding bills and avoiding more debts to accumulate.

Look over your credit report

Request a copy of your credit report and see if any inaccuracies might have contributed to your rejection. You can dispute these errors and fix your credit report before applying for another loan, which might increase your chances of getting approved.

Continue saving

If the reason for rejection was inadequate savings for the down payment, save more money before you reapply. The bigger your down payment, the more chances you have of getting approved next time you apply. Not only that but putting down a larger value will yield lower monthly payments once you get approved.

Consult

Talk to a mortgage broker who can help you determine your next best course of action. While you’re at it, you might also want to consult a financial advisor to help get your finances in better shape before buying a house.

Getting rejected is no fun, no matter the context, but especially when you’re trying to buy a home. However, getting rejected for a home loan is not a roadblock to your homeownership dreams but a mere speed bump.

If your home loan application gets rejected, resist the urge to apply to another lender or resorting to sketchy loans. Instead, determine the reason/s for rejection, and start working on those problem areas until you have resolved them. After improving your credit score, reducing your debt, increasing your income, and fixing other issues with your finances (that has affected your application), you can consider reapplying again. This time, you might have higher chances of getting approved.

Do you have home loan rejection stories to share with other homebuyers? Don’t hesitate to leave them in the comments below!

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