A home may be one of the biggest investments you make so you may not be able to afford the purchase on your own. If you need assistance paying for a new home purchase, you can apply for a home loan.
A home loan, or mortgage, provides the purchase price for the house and as the borrower, you’re responsible for making monthly payments plus interest to the lender. You may also need to pay a portion of the purchase price, called a down payment. Closing costs or other home purchase fees may also be out-of-pocket expenses or rolled into the loan balance.
The home itself is collateral for the mortgage and if you fail to make payments, the lender can take over ownership of your house. Before you’re offered a mortgage, you may be asked to prequalify for a home loan. The lender takes a brief look at your qualifications to determine your eligibility.
However, even if you prequalify, it doesn’t guarantee you’ll be approved for a loan. If you’ve been denied for a mortgage, it’s important to understand the reasons for the denial. You can work to improve your financial situation and meet the lender’s eligibility requirements to finance your home.
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Reasons You Were Denied a Home Loan
Even if you were prequalified for a home loan, any financial change that occurs can affect your eligibility and cause a lender to deny your mortgage application. You could be denied a home loan if you don’t earn enough income, have no credit or a low score, switch jobs during the home buying process, or have unexplained bank account deposits.
Low Income
Before you’re approved for a home loan, a lender must ensure that you have the income to afford the monthly payments. The lender analyzes your income and considers your current debt and your ability to pay.
If your income is too low, you may be denied for a home loan. It’s important to determine how big of a mortgage you can afford before you begin shopping for a home. If you can’t afford the home you want, you may not be ready to buy a house until you can increase your income or decrease your current expenses.
Low or No Credit
Lenders also perform a hard inquiry on your credit so they can look at your credit score and determine if you’re a worthy borrower. It can be tough to buy a house with no credit since a lender may assume you’re too much of a risk to qualify for a mortgage.
Your credit report shows your experience with borrowing money and the current debt you owe. If you don’t have a significant credit history or you have a low credit score, you may be denied for a home loan.
Job Change
Your job history and salary are also an important part of the home loan application process. A lender is concerned with your job history and how long you’ve been working for your current employer and earning your current salary. If you’ve had a stable job for a while, the lender sees you as less of a risk.
If you’ve experienced a job change or job loss while attempting to buy a house, it’s likely that a lender will deny you for a mortgage. Without a solid job history and no guarantee that you’ll earn the same income you were earning, a lender may not feel you’re a financially stable borrower.
Unexplained Deposits
Before you close on a home, the lender reviews your bank activity to confirm your income and expenses. Large and suspicious deposits are red flags for lenders because they may assume it’s a gift that you’ll need to pay back.
If you have an unexplained deposit in your bank account leading up to your closing date, the lender may deny your home loan at the last minute. Before allowing for a big deposit, it’s important to speak with your lender and provide documentation that shows where the deposit came from and your responsibilities for paying it off.
Next Steps After Getting Denied a Home Loan
If a lender denies your home loan application, there are several ways to focus on improving your financial situation so you can attempt to buy a home in the future.
Work to Improve Credit
If you were denied for a home loan due to your credit score, take the steps necessary to begin improving it. There are many ways you can immediately increase your credit score, including the following:
- Setting reminders for when your monthly payments are due.
- Setting up automatic payments directly from your bank account.
- Creating a personal budget that keeps your income higher than your expenses.
- Not accumulating additional debt.
Thoroughly review your credit report for incorrect information or errors. Dispute these errors with the credit bureau or creditor. If these items were negatively affecting your score, it should improve once they’re removed from your report. When your credit score improves, you may be eligible for a home loan if you meet all other lender qualifications.
Decrease Debt
Your debt may be what causes your mortgage application denial. Focus on paying down your current debt and don’t take out any additional loans or lines of credit. With less debt, a lender may see you as less of a risk and you may qualify for a home loan.
Build Credit
Without credit history, a lender has no way of knowing if you’re a financially responsible borrower. You can build your credit by continuing to pay your credit and loan-related bills on time. To develop a more robust credit history, consider using a secured credit card and paying off the balance each month.
If your mortgage application was denied by a lender, identifying the reason for the denial is key. Once you know why your application was denied, you can begin working on improving your financial situation. After making these improvements, you may then qualify for a mortgage and become a homeowner.
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