So you are ready to take the plunge and buy a home. Good for you! Homeownership is an awesome moment in an adult's life, but it is also a big commitment. The banks see it the same way, and that is why they take many steps to ensure that you and your family are ready to take on this huge responsibility. In some instances, they may determine you're not ready, and you find your mortgage application declined.
It is natural to feel disappointed if you are declined for a home loan, but it doesn't mean you can't make changes to increase your chances next time. There can be many reasons why you didn't make the cut, but most of them can be rectified. Let's look at the steps you should take to have everything you need to succeed when you reapply.
Reason For Having Your Mortgage Application Declined
There are multitude potential reasons why you may be declined for a home loan. Luckily, the lender is required to tell you why you were turned down, so you can take the proper steps to rectify it. If you recently found a new job, then you could be declined while you prove that this new position will provide a stable income that will allow you to make monthly payments on a home. You could also be declined if you fail to complete the application in its entirety or you omit important info, like how many people live in your household.
However, in most cases, you will be declined because of a financial problem, and a typical issue is that you have too much debt. When you apply for your loan, the company will make a hard inquiry on your credit and view your report to see how many accounts you have and if you are currently paying them back. If you aren't up to date on a $1,000 credit card debt, then they will probably not trust you with a $2,000 monthly payment. So you need to get these debts under control before you can take on a new home.
On the other side of the coin, you could also see your mortgage application declined because you do not have a credit history at all. Lenders need to see a history of having bills and paying them so they can be confident that you will keep up the behavior with a home loan. Start by obtaining a credit card and use it for grocery shopping and other tasks and pay off the balance at the end of the month. Doing so will raise your credit score.
You could also find a parent or trusted friend who can cosign for you, and the bank will consider your backup plan.
Tighten Your Finances
You may also have your mortgage application declined because you do not make enough money. When looking at homes, be realistic about what you can afford, and if you don't have enough or have just enough to pay the mortgage but not your other bills, then you may be declined. Experts recommend that all housing expenses, including the mortgage payment, taxes, and insurance shouldn't exceed 28% of your monthly expenses.
If you don't want to find a new career and start the process all over, then consider adding supplemental income with a side job. This could be anything from driving an Uber to freelance writing online. Once you have had the second job for a while, you can consider reapplying.
Before you do, however, you also want to assess your finances and determine what money is coming in and what you will have leftover after paying the bills. Do this by preparing a budget. Begin by looking at all income streams and compare what you make with how much you pay out with all of your recurring bills. This includes your rent, utilities, taxes, food, entertainment, and child care expenses.
Once you determine what is incoming and outgoing, figure out what you can eliminate in order to afford a new house payment. Instead of going out for coffee every morning, brew your own at home. Cut down on restaurant bills and make food that you buy at the supermarket. If your issue is that you forget to pay your bills on time, then you need to rectify this, or you will never get out of your financial hole.
Go to each of the utilities and set up automatic billing, so your payments are always on time. This will help to improve your credit.
Decrease Your Debt, Increase Your Savings
During this time, don't apply for new credit cards or acquire new expenses until you decrease the debt you have now. There are two schools of thought when it comes to paying off debt. Some experts say that you should pay the largest bill off first, while others say pay all the small debts to get them out of the way. What you decide depends on your way of thinking. However, by paying the small debts first, you will get a feeling of accomplishment, and as you knock out these small debts, you will feel more encouraged to continue.
With your debt under control, you will likely have more money at your disposal. Make sure to use it wisely. Consider putting most of it in savings, and over time, you will accrue a large sum that you can put towards the house in the form of a down payment. The more money you have to pay upfront, the less your mortgage payment will be, and the lender will see that you have a better chance of paying your monthly bill.
Consider putting your money in a high-interest savings account, which will grow your money over time. Again, you can put automation to work and ask your employer to deposit a portion of your paycheck directly into this separate account so the deposit amount will stay the same, and you don't have to remember to add it every month. Many lenders require this money to be in savings for over two months to ensure that it is legitimate, so it is better to start saving sooner than later.
In Canada, take advantage of a Registered Retirement Saving Plan, which allows you to get a tax refund for contributions, AND permits you to withdraw money for a home purchase.
To many, owning a home is the most important aspiration of their life, but it won't be handed to you. Get your finances and credit in order now, and improve your chances of reaching that dream. Having your mortgage application declined does NOT mean the end of the road for your home buying dreams.
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About the PublisherBo Kauffmann is a residential real estate agent with over 18 yrs experience in helping buyers and sellers achieve their goals. Inducted into the REMAX Hall of Fame in 2010 and receiving the REMAX Lifetime Achievement Award in 2019, Bo has sold over 500 houses and condos in the Greater Winnipeg market. He is an accredited buyer representative (A.B.R.) and a Luxury Home Marketing Specialist. Bo provides exceptional service to First-Time Home-Buyers, Seniors looking to downsize and Home Sellers of all ages. He can be reached easily By E-Mail or call/text him Call/Text Here
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