LORI MADDEN | Sarasota Real Estate, Longboat Key Real Estate, Siesta Key Real Estate

Going through the process of applying for a mortgage only for your application to get denied can be a frustrating and confusing time. If you’re hoping to buy your own home in the near future, it’s vital to secure financing or you risk missing out on a home that you may have been depending on getting.

In today’s post, we’re going to talk about what happens when your mortgage application is denied and what you can do to fix the problem as quickly as possible.

Determine the Cause of Denial

If your application is denied, priority number one needs to be to understand what happened. Since lenders are required to provide denied applicants with a letter explaining why they were denied, this just means reading the letter and making sure you understand all of the reasons listed.

There are a few common reasons that an application may be denied. Some of them are simple fixes, while others might require time and effort on your part that may delay your house hunt for a while.

One issue that many mortgage applicants have to handle is when their employer won’t provide proof of income to a mortgage lender. Since income verification is vital to the mortgage application process, it’s important to make sure you can provide all of your income details from the last 2 years to the lender.

Sometimes there are issues with contacting employers, such as when your former place of employment goes out of business. Or, you may be a freelance or contract worker with atypical forms of income verification. Regardless, make sure you are clear with your loan officer regarding your employment history.

Other common causes for denial of an application include problems with your down payment (such as not meeting the required down payment amount) and credit history issues, such as having a lower score than you thought.

Credit score lower than expected

It’s not uncommon for a lender to run a credit check and come up with a score that is lower than you anticipated. Since scores change on a monthly basis, and since there are differences between the scores provided by the three major credit bureaus, you might find that your lender found a score slightly lower than what thought.

If the score is drastically different, however, this could be a sign of two things. First, make sure that you haven’t recently made multiple credit inquiries (such as applying to several lenders who perform credit checks) or by opening new credit cards or loans. These inquiries temporarily lower your credit score.

If you haven’t recently made any inquiries (other than applying for a mortgage with your lender of choice), then it’s a good idea to get a detailed credit report and scrutinize it for errors. Inaccuracies on your credit report can be disputed and resolved and can give your score the boost you need to be competitive on your mortgage application.  

Choosing a different lender

While most lenders use similar criteria in determining your borrowing eligibility, there are some differences between lenders.

For example, some lenders might take on more risk by lending to someone with a lower credit score. However, they will also likely require a higher interest rate in exchange for the added risk they’ve acquired.

Now that you know your options for what to do when an application is denied, you’re well-equipped to start tackling the issue and getting back on track to becoming a homeowner.

Just the thought of having to pay on a mortgage for three decades can leave a sinking feeling in the pit of your stomach or restless sleep. Fortunately, there’s away to get relief. You could pay your mortgage principal off early.

Paying your mortgage principal off early is smart because most banks stack your interest onto early or upfront mortgage payments. It’s similar to how credit card companies and college student loan lenders set up your payments so that they recoup much of the interest early.

Start chipping away at mortgage payments

To reduce the amount of total interest that you pay your mortgage lender, consider paying more toward your principal. To achieve this, you could:

  • Get a low interest rate mortgage, preferably a fixed interest rate.
  • Refinance your existing mortgage. If you have a 30-year mortgage, consider getting a 20 year mortgage. A downside to refinancing is that your monthly payments will increase, in part because you’ll pay closing costs again. Use a mortgage calculator to determine what your new monthly payments will be before you take this route. Confirm the payments with your lender before you ink a new contract. Make sure that you can regularly make the payments on time even if your or someone you co-signed the mortgage with gets laid off.
  • Submit your mortgage payment before the due date if you have a simple interest mortgage. With a simple interest mortgage, interest builds over the course of a month. Sending in a mortgage payment before the due date could save you from paying additional interest. As a tip, this step also works with paying down credit card balances that are on a simple interest plan.
  • Avoid late payments. Not having to pay late fees and fines is an all-around advantage. Submit too many late payments and your lender could raise your interest rates. Of course, submitting late payments also impacts your credit score.
  • Put money that you earn freelancing, contracting or working overtime toward your principal.
  • Rent out a portion of your home to generate extra income. Use this money to pay your mortgage off early.

Paying your principal down early is a great way to start living mortgage free. But, the early payoff doesn’t suit everyone. Consider your lifestyle. If your children will be attending college within three years or less, you may want to postpone paying more toward your mortgage principal and simply continue making your minimum mortgage payments. Other reasons that you may want to wait to increase your mortgage payments include caring for aging parents, job uncertainty and exceptionally low interest rates.

It can make better financial sense to invest in an IRA to grow your wealth if your mortgage interest rates are exceptionally low. On the other hand, paying your mortgage off early can position you to walk away with a larger profit should you sell your home. Paying your mortgage off early also gives you more financial freedom to enjoy travel, invest in art and enjoy more life experiences that you appreciate. And it’s a great way to reduce stress and enjoy a good night of sleep.