by Dana George | Updated July 19, 2021 - First published on May 23, 2021
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One roadblock does not equal the end of homeownership dreams.
You've decided to do it: You're going to take the plunge and buy a home. You apply with a local or online mortgage lender, only to receive word that your application has been denied. While it's disappointing, you're not alone. Mortgage denials happen to a lot of people. The first thing you should do is pick yourself up, dust yourself off, and explore your other options.
Secure access to The Ascent's free guide that reveals how to get the lowest mortgage rate for your new home purchase or when refinancing. Rates are still at multi-decade lows so take action today to avoid missing out.
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According to the Equal Credit Opportunity Act, if credit played a role in your loan denial, lenders must provide you with a letter laying out specific details. Here are the four primary reasons loans are denied:
Different mortgage lenders have varying appetites for risk. While one lender may have turned you down, another might find you the "ideal" candidate for a loan. If the reason the first lender denied you was insufficient credit, you can apply for a loan through a lender that specializes in mortgages for poor credit.
However, if your loan application is approved, you can expect to pay a higher interest rate. That's because this lender's business model is "greater risk for a greater reward." In this case, earning more interest on the loan is the reward.
Just remember that applying for a loan will ding your credit score slightly. As you shop for a mortgage, make it a point to apply for all loans during a short time period (two weeks should be sufficient). That way, the credit reporting agencies recognize that you're rate-shopping, and you'll only be dinged once, even if you apply with a dozen different lenders during that window.
Ask your real estate agent to help you locate properties offering owner finance. Here's how that generally works: You make a down payment and sign a loan agreement (as you would on any property). You make a monthly payment based on the agreed-upon interest rate directly to the owner for a set number of years (typically five to 10). At the end of that fixed period, you have a balloon payment due. You then refinance the loan with a mortgage lender and pay the balance due, or sell the property and pay the balance.
Owner-financed homes can be tough to locate in a hot seller's market, but it's an option worth exploring.
If an owner-finance deal is a no-go and you can't find a lender to approve your loan at an interest rate you can afford, it might be time to address the issue that prevented you from landing a mortgage.
Perhaps you just need to stay in your job a bit longer or provide proof of a cash source. Or maybe you need to take time to build a long enough credit history to make lenders confident in your ability to repay.
If a low or bad credit score is an issue, here are some steps that can help you boost your score:
You may be disappointed to have your mortgage application denied, but there's no reason to believe you're defeated. Addressing the root cause of loan denial is the surest way to get back out in the house hunt.
And when you're ready to try again, make sure to check out our guide on how to apply for a mortgage.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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