After making the responsible decision that it's time to buy a place of your own – whether you have an affinity for home improvement or you're tired of spending so much to rent a place that isn't even yours – and taking the mortgage application plunge, a loan denial can feel like a kick in the gut. Ouch.
Before you swear off of ever owning your own home with a renovated kitchen, think long and hard about why you may have been denied. Perhaps a long-ago spending binge left you with more credit card debt than is desirable, or maybe you don't even use a credit card because you're extremely wary of creating personal debt.
To save yourself from endless questions or confusion post-denial, it may be best to consult with a financial professional or mortgage broker and find out exactly why you were denied. Depending on what risks you posed as a potential borrower, there are some tips to follow that may improve your chances in the next application.
A less-than-stellar or nonexistent credit score
It should come as no surprise that credit is a major deciding factor in determining whether you are a quality mortgage candidate – a spotty payment history, large amounts of debt or total lack of credit can all discourage lenders from granting approval.
However, all is not lost. For starters, you can request a copy of your credit report to get an idea of where you stand compared to other candidates. Financial advisers and professionals can recommend a target number, which, when achieved, can indicate enough improvement that a mortgage application could be successful. Paying bills on time can also help increase a credit score.
You're also encouraged to request a copy of your credit report even if you don't have a strong credit history to get a better idea of where you stand. Build up your credit and improve your ratings by borrowing responsibly and always paying bills on time to avoid escalating credit card debt.
Your dream home costs more than you can borrow
Use common knowledge when house-hunting and apply for a reasonable mortgage based on how much income you have. Even if your credit score is relatively flawless and your rating could bring a tear to a financial adviser's eye, lenders will be hesitant to approve a mortgage that will make the borrower house poor. In other words, banks want to make sure you can afford to have a life outside of mortgage payments – they also want to make sure you can afford to make those payments.
Using a mortgage calculator or consulting with lenders and mortgage brokers can give you much more insight for future applications and ensure your loan requests aren't unreasonable.
Your employment history leaves lenders trying to fill in the pieces
You may be denied a mortgage if you have a history of temporary jobs or gaps in your work history – even if they were unavoidable and you are currently employed. Lenders may think that history will repeat itself and leave you without money to pay them back.
Some mortgage lenders prefer applicants be steadily employed in the same position for at least six months, so that is most desirable. However, job changes don't automatically mean loan denial and there may be underlying issues that you're not even aware of. When in doubt, talk with a pro.
Maybe you just left a few things out
There is a chance that lenders chose to deny your mortgage application simply because you didn't give them all the information you have. This can be an easy-enough fix: Next time you apply, be sure to give all information, regardless of whether you think it could hurt your chances. Odds are leaving information out of the application will be a more serious red flag than including it in the first place.