If you get denied an FHA loan, it’s not the end of your home ownership dreams. You can take a few simple steps to get that approval you’ve always wanted.
Find Out Why
The first step is the most crucial and will determine the path you take. You must find out why you were denied the FHA loan. If a lender pulled your credit, which they would for a mortgage, they have to tell you why you were denied. It’s the law.
The lender has 30 days to tell you in writing why you did not get approved for the mortgage. This letter can then help you as you move forward. Luckily, you have the law on your side when you don’t get the approval you wanted. The lender must be specific in their reasons and tell you the credit bureau’s report they used to make the decision.
With the letter in hand, though, you may also want to call the lender. They can tell you in more simplified terms why you were turned down. They may even give you helpful tips on how to move forward.
The Common Reasons for an FHA Loan Denial
While every case is unique, there are some common reasons why you might get an FHA loan denial:
- You can’t prove you have enough money for your down payment
- You don’t have enough income to cover your debts sufficiently
- You don’t have a high enough credit score
- The home is not worth enough
You can rectify most of these reasons, with the exception of the last one. If the home does not appraise high enough, you can’t change its value.
Fix the Problems
Now it’s time to work out the problems the lender stated. If they don’t think you have enough money for the down payment, look at your sources. You can’t use cash as a down payment source. Every penny must be in the account you will use to put the money down on the home. If you have several accounts, maybe you omitted the statements for one of the accounts. Double check and see if you gave the lender everything.
If you truly don’t have the money, you can start saving more until you reach the down payment the lender requires. Generally, this means 3.5% of the purchase price. You can also obtain gift funds from a relative, employer, charity, or close friend. Again, the lender will source the funds, but they can count as long as the donor can prove the money is a gift and not a loan.
If your debt ratio was too high, you have a few options. You could try to make more money, but that is often the harder option. You could also try to pay debts off to lower the debt ratio. The FHA generally allows a total debt ratio of 41%. Try decreasing your debts to fit within 41% of your gross monthly income.
If you don’t have a high enough credit score, this will take a little more work.
Fixing Your Credit Score
The FHA allows credit scores as low as 580. However, some lenders require a higher score. If yours didn’t pass their standards, you may be faced with a denial. You have a few options:
- Try another lender as long as your score is above 580
- Fix your credit score
If you opt to fix your credit score, you have some work to do. First, request a copy of the credit report from the bureau the lender used. Then go over the credit report to see why your score is low. A few common reasons include:
- Too many revolving accounts
- Outstanding balances too high compared to total available balance
- Credit accounts too new
- Too many inquires
- Too many late payments
Once you know the reasons, you can start fixing the issues. First, however, make sure everything is accurate. Are all of the accounts yours? Did you really make late payments? Accidents happen, so making sure your credit report is right is a key factor.
Next, you can start fixing the issues. If your balances are too high, start paying them down. If you have too many inquiries, wait it out and don’t apply for anything new. If you have late payments, bring everything current.
Your credit score won’t change overnight, but with the right steps, it will improve over time.
The final step after getting denied an FHA loan is to keep shopping. If you had some factors to fix, do that first. Once everything is in line, try applying for a loan again. You don’t necessarily have to go back to the same lender. You can try any FHA approved lender you want. You never know when another lender may approve your loan.
Getting denied an FHA loan isn’t the end of the world. Even if it takes you a little while to fix things, you can get back up and apply again. There are many FHA lenders out there that can help you. Don’t let one turned down application get you down.