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You have decided to do it: you are going to take the plunge and buy a house. You apply at a local or online mortgage lender, only to receive a message indicating that your request has been denied. Although it is disappointing, you are not alone. Mortgage refusals happen to a lot of people. The first thing to do is get up, dust yourself off, and explore your other options.
According to the Equal Credit Opportunity Act, if credit played a role in your loan refusal, lenders must provide you with a letter with specific details. Here are the top four reasons why loans are refused:
- No credit: If you are just starting out, you may not have had time to build up enough credit history to make the lender feel confident about lending you.
- Low credit: your credit score tells a lender how you’ve handled your credit in the past. If your score is low, the lender will fear that you will not pay off a mortgage as promised.
- Job Change: Lenders love that you have been in the same job for a while. This gives them the assurance that you are not going to quit your job to join the rodeo the moment you close a house.
- Sudden influx of cash: Suppose a lender examines your bank accounts and notices a large and unexplained cash deposit. In this case, he naturally starts to think of one of two things: maybe someone has loaned you money, and you are going to have to pay it back. Or maybe the money is dirty and there will eventually be an episode of Law and Order based on your exploits. The lender wishes to avoid either of these situations.
Different mortgage lenders have different risk appetites. While one lender may have turned you down, another might find you the “ideal” candidate for a loan. If the reason the first lender turned you down was insufficient credit, you can apply for a loan from 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. This is because the business model of this lender is “greater risk for greater reward”. In this case, earning more interest on the loan is the payoff.
Remember that applying for the loan will slightly reduce your credit score. When shopping for a mortgage, be sure to apply for all loans for a short time (two weeks should be enough). This way, the credit reporting agencies recognize that you are making rate purchases, and you will only be knocked once, even if you are applying to a dozen different lenders during that window.
Explore homeowner financing
Ask your Real estate agent to help you locate properties offering owner financing. Here’s how it generally works: you do a advance payment and sign a loan agreement (just like you would on any property). You make a monthly payment based on the agreed interest rate directly to the owner for a number of years (usually five to 10). At the end of this fixed period, you have a lump sum payment due. You then refinance the loan with a mortgage lender and pay off the balance owing, or sell the property and pay off the balance.
Owner-financed homes can be difficult to locate in a hot seller’s market, but it’s an option worth exploring.
Group and try again
If a homeowner finance transaction is prohibited and you can’t find a lender to approve your loan at an interest rate you can afford, it may be time to address the issue that kept you from taking out. a mortgage loan.
Maybe you just need to stay a little longer in your job or provide proof of a source of cash. Or maybe you need to take the time to build a credit history long enough that lenders are confident in your ability to repay.
If a low or bad credit score is an issue, here are some steps that can help boost your score:
- Check your credit reports. One in five Americans who check their reports find at least one error. Even a single mistake can lower your score. Your first step should be to order a free copy of your credit report. You can get one of each of the three major credit bureaus and check them, looking for incorrect information. If you find anything, report it to the agency in question. They then have 30 to 45 days to prove that the information is correct or to remove it from your credit report.
- Pay off existing debt. 30% of your credit score is based on the amount you owe creditors of all kinds.
- Make all your payments on time. Although it takes months to see results, it is the easiest way to increase your credit score.
- Take a secured credit card. Let’s say you want a spending limit of $ 1,000. You put $ 1000 on the secure card and borrow from those funds. Like a regular credit card, you make monthly payments that are reported to the credit bureaus.
You might be disappointed to have your mortgage application turned down, but there is no reason to believe that you are defeated. Addressing the root cause of loan denial is the surest way to get back to looking for housing.
And when you’re ready to try again, be sure to check out our guide on how to apply for a mortgage.
A historic opportunity to potentially save thousands of dollars on your mortgage
There is a good chance that interest rates will not stay at their lowest level in decades. That’s why it’s critical to act today, whether you want to refinance and lower your mortgage payment or are ready to pull the trigger when buying a new home.
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