For the first time since 2012, total mortgage originations are expected to exceed $2 trillion this year thanks to strong home sales and housing price gains across the nation. As of July, refinance rates were up 50 percent year-over-year, and with interest rates predicted to stabilize around 3.5 percent, they should remain at about that level for the remainder of 2016. What does all this mean for millions of U.S. homeowners and potential homebuyers? Simply put, now is an excellent time to buy your first property, move up or refinance your current loan.
Of course, not all mortgage applications are approved. Whether you’re purchasing or refinancing, ‘complicating circumstances’ can lead lenders to reject you. In fact, according to Zillow, 11.2 percent of applications for conventional home loans were denied last year. Fortunately, there are plenty of steps you can take to improve your situation should you be turned down for a mortgage.
- Start by figuring out why your application was rejected.
Low credit scores—or a complete lack of credit history—are common reasons lenders reject potential borrowers. So are high loan-to-value and debt-to-income ratios. If your application is rejected, you’ll generally receive a letter from the lender explaining the reason. You can also contact the lender for additional insight into your specific situation if necessary.
- Take action to remedy the situation.
If you were rejected due to a low credit score, you’ll have to work on improving it. Review your credit report for errors and request corrections. Pay down your revolving debts—and make those payments on time. Steps like these will lead to a higher credit score over time. Paying down debts—or taking on a second or higher-paying job—will also help you if you were rejected due to a debt-to-income ratio that was too high.
If you were attempting a refinance and turned down for high loan-to-value, you can look for ways to improve your home’s value (such as making repairs and improvements) and try again, or focus on paying off a larger portion of the loan balance to increase your equity in the property and reduce loan-to-value.
Whatever the reason for rejection, your lender should be able to advise you on the steps you can take to alleviate their hesitation.
- Consider alternative loan types.
You can also ask your lender about alternative loan products. For example, government-backed FHA loans, which are insured by the Federal Housing Administration, have lower credit score and down payment requirements. If you’re a veteran, you may be able to qualify for a mortgage through the VA loan program. Direct Home Loans are available for Native Americans, or you may be able to qualify for a Rural Housing Loan if you live in an eligible rural area. You can learn more about the various government-backed loan programs available here .
- Enlist the assistance of a cosigner.
If you’re having difficulty qualifying for a conventional mortgage and are not eligible for a government-backed mortgage, you might want to talk to a family member or friend about cosigning your loan. As a cosigner, they’ll apply for the mortgage with you. This means the lender will consider their financial information (credit score, income, etc.) in addition to yours. If he/she happens to be an attractive borrower (with excellent credit, for example), it may help you secure a mortgage.
A mortgage rejection is disappointing to say the least, but it doesn’t have to be the end of the world. Talk to your mortgage lender, take the appropriate steps to improve your situation, and explore additional options. You may still be able to make your dream of home ownership or a refinance a reality.