Why You May Keep Getting Rejected for a Pre-approved Mortgage

Getting pre-approved for a mortgage is a first step towards buying a house. Suppose your pre-approval is rejected? Though disappointing, it doesn’t mean your home-buying dreams are forever ended. Why was it rejected and how can you improve prospects of getting approval in future.

What Is Mortgage Pre-approval?

A mortgage pre-approval is a letter from a lender that states you’ll likely qualify for a mortgage loan based on the financial details provided. The letter includes how much money you may be approved for. The pre-approval process varies for every lender. Some request only basic details like your name, annual income, and estimated credit score, while others need credit checks and full documentation of finances.  A pre-approval is neither a mortgage approval, nor a funding guarantee. Pre-approvals assist the home-buying process, laying a prospective budget, and reassure sellers that you can secure financing.

Why Do Lenders Deny Preapprovals?

Lenders deny applicants for various reasons, but much depends on perceived risks. As per Consumer Financial Protection Bureau’s (CFPB) analysis of 2019 mortgage-application denials, high debt-to-income (DTI) ratios led to 33% of denied mortgage applications while poor credit history was the next common reason for denials.  8.9% of mortgage applicants in 2019 were turned down. The Home Mortgage Disclosure Act requires lenders to report why mortgage applications were rejected, but the same reporting standards do not apply for denied preapprovals.

Your Debt-to-Income Ratio Is High Or Your Credit History Is Poor

Your DTI reflects how much of your monthly income services your debts, including things like credit card bills, student loan repayments, and expected future mortgage payments. Of the applications denied, around 30% were due to DTI, as per CFPB analysis. Most lenders prefer a DTI lower than 43%.  Your credit history plays a role as lenders review your payment habits, how much credit limit you used and the various credit cards and loans secured. Late payments, accounts in collection, and very high debts could factor a denial. About 19% of denied applications in 2019 were due to poor credit history, as per CFPB. Mortgage lenders tightened lending standards after the coronavirus pandemic by enhancing credit scores and down payment requirements, while some lowered DTI ratio requirements. These ensure more difficult pre-approvals now.

What to Do If You’re Denied 

If your lender rejects your application for preapproval, ascertain reasons to identify the issues involved and prepare an action plan to resolve issues:

Improve credit scores: Pay off balances on your credit cards, settle accounts in collections, reduce overdue payments, and inform credit bureaus of errors in the credit report.

Be consistent: Pay all bills on time and ensure steady employment. These boost approval chances.

Repay your debts: Reduce debts to lower DTI ratio under 43%.

Locate additional income sources: Increasing income reduces DTI. Take on a side gig or ask for a raise; lenders typically take past two years of income into account when assessing ability to repay mortgage. Applying to several lenders helps as qualifying requirements vary by lender.

The Bottom Line

Having your pre-approval application denied, doesn’t mean your home-buying idea is shot. Ascertain reasons for denial to remedy issues involved, by reviewing your credit report often and evaluating improvements. Seek the services of a credit/ housing counselor to prepare the best strategy for credit access.