Now let's talk about what happens when your loan gets denied, and what you can do next. So having your loan get denied can be one most frustrating things.
So, first of all, let's talk about why this can happen. The first thing that you need to do is you need to talk to your lender about why you got denied in the first place. You don't just want to say or hear from a lender we're not able to move forward with your application or your loan was denied and then not know why. You want to hear: was it because of your debt to income? Was it credit? What issues were going on that led to that? So ask questions, if you aren't able to move forward with a mortgage application.
So some common things that can keep your loan from getting approved. One is your credit score.
So maybe your credit score is too low for the loan program you're applying for. Maybe you have credit issues, something like a recent bankruptcy, foreclosure, or short sale.
You could also have a debt-to-income ratio that's too high, meaning you have too much monthly debt for the income that you have.
Possible employment or income instability, so if your income is declining or you don't have a strong history of employment.
Here's a big one, insufficient funds. A lot of times I see mortgage applications that are super solid, except they just don't have money in the bank to be able to pay for their down payment and closing costs. And there are programs that can help you, with things like down payment assistance normally, in my opinion, they don't tend to be the best type of loan that you could get, compared to if you just saved up money for a down payment and closing costs, but that's a huge one that can trip you up.
Something to keep in mind is getting denied is not going to affect your credit score. You're going to have an inquiry on your credit report, but it's only going to affect your score by anywhere from zero to five points. The inquiry itself isn't going to harm you and getting denied is not going to harm you at all either.
So let's take a quick #CalmMoment. So getting denied can be super frustrating because you're going through all the emotions of wanting to purchase a home. You're sharing all this info with somebody, all this private information. Then when you just get told to know with no reason or walkthrough, it can be embarrassing and overwhelming and incredibly disappointing.
So if you're at that spot, I want you to take a breath and slow down because it can be really easy to get frustrated and take it out on the loan officer or, to just completely abandon the dream of purchasing a home.
Know that you're a loan officer, their goal is not to deny anybody. They want to approve your loan. But sometimes they might not give you the explanation that you need. So if you're in that spot, take a moment. Maybe you do this over email and ask, Hey, can you give me just a detailed list of things I need to work on to be able to get approved?
So here's what you can do. Number one you don't want to give up, it can be really easy to just completely stop the home buying process and move on to something else and spend your money elsewhere. But you really don't want to do that. You're at the spot now where you can make the decision, you can choose to work on things to get you in a home in the next three, six, 12 months here.
Also, get a reason from your lender. You want to understand exactly why you didn't get approved. Now know that lenders can't always give you the exact reason why. And that's not because they don't want to is because sometimes lenders themselves don't know, see underwriting normally happens with computer software, and the computer software is created so there are a few unknown factors that go into approval or denial and they're constantly changing. So for instance, if we get a denial coming back from the software, it doesn't always tell us exactly why it got denied. It doesn't say the debt-to-income ratio was too high for this specific credit score. It just says, here's the denial. So your loan officer should be able to help you come up with a game plan on things that you can work on.
Also, you could get another opinion, so this would be best if you're doing it with a different type of lender. So if you got approved by a bank, maybe try to talk with a broker.
If you got approved with the credit union, maybe try to talk with a bank, you know, to try another, another lender, get another opinion, to see if somebody else has a product that can help you because some lenders are a lot more strict than other lenders in their requirements.
You could also explore adding a co-signer. So adding a co-signer can help strengthen your loan application. So this is where you're adding somebody on their income and their debts as well along with our credit score to help you improve the quality of that loan.
And then finally, what you can do is you can make a game plan. So this is where you're going to say, Hey, these are the things I need to do. I know I need to work on my credit and I know I needed to build savings, or I know I need to be at this job for six more months create that game plan, know the steps that you're going to have, list them out, and then you're going to have to execute that plan as best as you can.