Applying for a home loan is the first major step toward buying a new house, and having the application be rejected can be a serious setback.
It’s important to note that just because your application was declined by one lender, it shouldn’t stop you from shopping around for another lender. Lending is a competitive business, and you may be able to find a different lender that is more flexible.
Still, it’s important to take stock of exactly why your application was denied, so you can potentially fix the problem to increase your chances of approval with a different lender. Here are some of the more common reasons a home loan application is denied.
A Low Credit Score
I’ve explained the importance of FICO credit scores in the past, but just to reiterate: They’re incredibly important to lenders. Lenders will look at your FICO score to determine your creditworthiness, and use it as a major part of approving you for a loan. It’s important to keep up-to-date on your FICO score standing, so you can know what to expect.
Everyone is able to get one free credit report each year. Taking advantage of this is important when buying a home. You can easily see red flags that could hurt your chances of qualifying for a loan, and potentially discover errors that can be corrected.
You’ve Recently Changed Jobs
Employment history is another big deciding factor for lenders. Typically, lenders prefer borrower’s to have been steadily employed at the same job for at least two years. If you’ve recently changed jobs, or tend to move from job to job, you could find it difficult to receive a loan. You may be able to try a different lender, but you might need to put off your purchase until you’ve been steadily employed longer.
Your Information is Inconsistent
Lenders tend to go through applications with a fine toothed comb. If there are any inconsistencies on your application, such as your listed income not matching up with employer records, the lender may flag your application. You will need to correct any inconsistencies before moving ahead with the loan. Make sure all the information you’ve provided is complete and accurate before you send it off to the lender.
Your Current Debt is Too Great
If you’re currently working to repay multiple sources of debt, the lender may decide that your current obligations are too great to add to. It’s recommended to pay off as much of your debt as possible before applying for a home loan.