How to Rebuild Your Credit After Being Denied a Mortgage
If you’ve been denied a mortgage, two things will likely happen. First, you’re going to feel as if somebody punched you in the stomach.
Scientists say the brain is wired to feel rejection the same as physical pain. It goes back to when hunter-gatherers lived in tribes.
Since humans couldn’t survive on their own, we developed an early warning system to alert us that we might be in danger of rejection. The people who felt it most acutely changed their behavior, remained in the tribe and passed the rejection-pain gene along. So if getting that denial letter was devastating, blame your prehistoric ancestors.
Then move on to the second emotion – curiosity. You’ll want to find out what went wrong and do something about it.
Determine Why You Were Rejected for a Mortgage
Chances are the problem will be a poor credit score. Before we tell you how to fix that, however, we want to reiterate that you shouldn’t take a mortgage denial too hard. There were 11.1 million loan applications in 2015, and the rejection rate was 38%, according to Joel Kan, economist for the Mortgage Bankers Association, so you have plenty of company.
The most common denial reasons are the applicant’s yearly income was too low for the loan requested. Or the loan-to-value ratio was too high, meaning the house appraisal was too low for the amount of the loan.
Lenders are required to explain the reasons for rejection if you request an explanation within 60 days. If you’re like millions of rejectees, you’ll find out the culprit will be credit issues.
Simply put, your credit score didn’t cut it. So what do you next?
Request Copies of Your Credit Reports
The FICO credit score scale goes from 850 (superb) to 300 (radioactive). Anything over 700 puts you in a good position to have your mortgage approved, though the FICO average score for closed conventional loans was 754 in July of 2016. FHA loans at the same time had an average FICO score of 686.
The higher your credit score, the lower the interest rate on your mortgage, which can quickly add up to tens of thousands of dollars of savings over the life of the loan. Just a 1% difference on a 30-year mortgage for $150,000 will mean a savings of $31,000 over the term of the loan.
Next, get out your fine-toothed comb and check your credit report for errors like outdated information, incorrect payment status or fraudulent charges that might have come from identity theft.
If the information is correct and you’ve legitimately earned your poor credit score, get to work on bringing that bad boy up.
Five Components Determine Your Credit Score
1. Payment history (35%)
Late payments, liens, foreclosures and bankruptcies are credit score killers that stay on your report seven to 10 years. If you have a late payment on record, call the creditors and ask them to remove it your account. If it’s the first time, you stand a pretty good chance of getting it cleared. If you’re still delinquent, pay up. If you can’t pay the full amount, see about working out a payment plan.
2. Amounts owed (30%)
With credit cards, try not to utilize more than 30% of your credit limit. But owing a little can be better than owing nothing. Lenders like to see that if you borrow money you are responsible enough to pay it back.
3. Length of credit history (15%)
A long track record is helpful, but a short one is fine as long as you’ve made the payments and don’t owe too much.
4. Credit mix (10%)
A variety like credit cards, mortgage, and installment loans is helpful. But don’t start opening accounts just to mix things. Only ask for credit if you really need it.
5. New credit (10%)
Don’t get too much new credit too fast. FICO assumes that if you’ve opened several accounts in a short period, you could be in a money crunch. If you don’t need the credit, don’t apply for it just hoping it will improve your credit score. It won’t.
When You Have Little to No Credit History
Qualifying for a loan can be tricky if you have no credit history, especially if you’ve avoided credit cards and paid cash for everything. Generally speaking, that is an excellent choice, but you want a mortgage, you need to prove that you can handle the responsibility of credit. If you’re too big a risk to get a credit card, you’re too big a risk to get a mortgage.
You can address that by applying for a secured credit card, which requires an initial cash deposit. For instance, you pay the card company $200 and get a $200 line of credit based on your risk factor. If you show a good payment history, the credit line increases, and before you know it, you’ll have an unsecured credit card, like most American consumers.
You can also establish a credit history by becoming an authorized user on a credit card. You’ll need to find a friend or family member willing to add you to their account. Just don’t join up with a deadbeat who doesn’t pay their bills on time since that will reflect poorly on your score.
It can take months for your credit score to start heading up, so be patient and diligent. It will pay off when you go searching for another mortgage.
Monitor Your Credit Score and Re-Apply
And don’t limit yourself to one lender. Rules, interest rates, and standards vary, so shop around. After you rebuild your credit, institutions will want to loan you money.
Then you’ll experience an emotion our hunter-gatherer ancestors never enjoyed — the pleasure of owning your own home.
(Burge, M.)(2016, Oct. 8). How your credit score affects your mortgage rate. Retrieved fromhttp://www.latimes.com/business/la-fi-credit-scores-20161009-snap-story.html
(NA)(2013, Aug. 28). When Is Negative Information Removed from Credit Report. Retrieved fromhttp://www.experian.com/blogs/ask-experian/when-negative-information-will-be-removed-from-your-credit-report/
(Kross, E.; Berman, M.; Smith, W.; Wager T.)(2010, Oct. 5). Social rejection shares somatosensory representations with physical pain. Retrieved from http://www.pnas.org/content/108/15/6270.full.pdf
(NA)(ND). Know Your Options. Retrieved from http://www.knowyouroptions.com/news/my-home-view-rebuilding-credit-to-buy-my-first-home
Green, D. (2016, August 19) Report: More Than 75% Of Mortgage Applications Now Closing. Retrieved from http://themortgagereports.com/21816/ellie-mae-july-2016-closing-rate-mortgage