If your home loan application is denied, don’t panic. There are ways to build your eligibility so that, next time, your mortgage application will be more likely to be approved.
Here’s what you should know about why your loan application was denied and how you can recover.
Why Your Loan Application Was Denied
If your loan application was denied, before you apply for another loan, it’s important to understand the qualifications your lender considers before saying “yes” or “no” to your application.
Lenders consider multiple factors when reviewing a loan application and two of the main ones are credit and income. Grounds for loan application denial based on credit or income could include:
- Not enough credit history.
- Missing too many credit payments.
- A high debt-to-income ratio (how much of your monthly income goes toward debt payments).
- Insufficient income.
- You asked to borrow more than you can afford to pay back.
Your lender is required to disclose to you within 30 days of the decision about why your loan was denied. You can also call your lender for further explanation.
How to Recover
Once you’ve identified why your loan was denied, you can begin to work toward building your eligibility for a mortgage.
Here are five steps you can take toward recovery.
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Talk with a Housing Counselor
If you don’t qualify for a loan, consider speaking to a community-based credit counselor or a HUD-certified housing counselor. These counselors can help you create an action plan to work on increasing your savings, decreasing your debts, improving your credit, accessing down payment assistance or taking advantage of first-time homebuyer programs.
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Improve Your Credit
If your credit history or credit score is one of the reasons your loan application was denied, take time to improve your credit profile before applying for another loan.
Good credit demonstrates that you can manage money responsibly, and having good credit gives you more purchasing power because it can open doors to better loan terms and products.
Freddie Mac’s CreditSmart® suite of financial and homeownership education resources — also available in Spanish — can help you understand the fundamentals of credit and prepare for homeownership.
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Pay Down Debt
In the application process, lenders will look at your recurring monthly debts, such as:
- Car payments.
- Student loans.
- Credit card payments.
- Personal loans.
- Child support.
- Alimony.
By lowering or paying down your monthly debts, you can build a positive credit history and lower your debt-to-income ratio. Start by paying off debt with the highest interest rate. Lenders generally prefer a debt-to-income ratio lower than 43% and a lower percentage is better. -
Obtain Gift Funds
If you don’t have enough money saved for your down payment, you may be able to use gift funds from a family member. Whether these funds cover all or part of the down payment, gift funds can decrease the amount you need to borrow from the lender.
Some loan programs may require you as the homebuyer to contribute a minimum amount from personal funds toward the down payment. Other programs, such as Freddie Mac Home Possible® mortgages, don’t have minimum contribution requirements for single-family or manufactured homes. Talk to your lender to make sure you understand down payment requirements.
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Find a Co-signer
A co-signer applies for the loan with you and agrees to take responsibility for the loan should you default. The co-signer’s credit, income and debts will be evaluated to make sure they can assume payments if necessary.
If you choose to have a co-signer for a loan, in addition to ensuring they have good credit, you should make sure they’re aware of this responsibility and have sufficient income to cover the payment.
Remember, you should only borrow an amount you feel comfortable repaying. You may need to look for a lower-cost home to make sure you are financially prepared to purchase and maintain your home.
For more information, resources and tools to help you understand what’s involved in looking for, buying and maintaining your own home, visit My Home by Freddie Mac®.
Last reviewed: January 23, 2024
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