Let’s be real: Rejection hurts. It’s particularly hard if you’re denied for a mortgage preapproval, which is one of the biggest hurdles in the home-buying process.
Mike and Brittany Delgado know the feeling all too well.
In 2013, the couple tried to get a mortgage preapproval and were denied. Why? Mike's credit report showed no history or FICO score.
"This was a surprise to us," says Brittany Delgado, adding that her husband had paid off old debts, but the couple had never taken steps to re-establish his credit.
“Our lender outlined exactly what we needed to do and told us to start small — finance some furniture or a laptop — and make payments on time to build the credit back up. She warned us it would take a while.”
The Delgados’ experience is reflected in the results of NerdWallet’s Home Buyer Reality Report 2017.
“According to our research, borrowers who don’t understand the mortgage process or don’t know enough about their own credit history tend to hit obstacles or be rejected when applying for mortgages,” says Tim Manni, mortgage expert at NerdWallet.
“Educate yourself early about how to address the major issues that will prevent you from qualifying for the right loan or the best mortgage rates.”
To avoid getting denied on a mortgage preapproval, here are five steps to take before you fill out an application:
Know where you stand. Review your credit report and check your FICO score to uncover any issues and determine if you need to build your score first. Calculate how much monthly debt you are carrying and how much you owe overall.
Move quickly to fix mistakes. Contact the credit reporting agencies immediately if you see any incorrect or false information on your reports. Mortgage companies generally want loans to close on time, so they’ll pay credit agencies to update your credit report quickly with a rapid rescoring service, says Joey Abdullah, a mortgage planner with Fairway Independent Mortgage Corp. in Arvada, Colorado.
Tackle debt head-on. Pay all of your bills on time and, if possible, in full every month. Learn which debts to pay down first to better your score quickly. For example, addressing delinquent collection accounts first usually has a more immediate impact on your credit score than paying down credit cards, says Steven Bogan, regional managing director of Glendenning Mortgage Corp. in Toms River, New Jersey. After you pay off delinquent accounts, make sure you have some good credit to show. If you don't have an open credit card or loan, establish a new line of credit to build a positive payment history for your mortgage preapproval.
Show consistent income over time. Your mortgage lender will want two years’ worth of tax returns and bank statements to show consistent income deposits. This can trip up a lot of borrowers, Abdullah says. First of all, if you earn most of your income from hourly wages, commissions or bonuses, or if you’re self-employed, you’ll need to provide two years of income documentation to your lender, Abdullah says. Expect to show your bank statements, pay stubs, tax returns and other financial paperwork. “Mortgage companies don’t go off your reality, and we don’t look at gross income but rather usable income [from tax returns],” Abdullah says.
Rein in spending, create a budget and stick to it. It’s crucial to control your monthly spending and avoid large purchases (like a car) to lower your debt-to-income ratio and qualify for better interest rates. Don’t forget about those inevitable maintenance and repair costs that come with homeownership; having a budget, as well as an emergency fund, is important for the long haul.
Bottom line if you fail a mortgage preapproval
Even if you are denied a mortgage, don’t lose heart, says Brittany Delgado. It took her husband two years to build up his credit. First, he financed a laptop and paid it off over 12 months. Then, he opened a credit card with a small limit, which was increased after several months of on-time payments.
Those efforts paid off. The couple was easily preapproved in 2015 for a USDA loan for a newly built home outside of Austin, Texas, where they now live with their two young sons.
“We had always dreamed of being homeowners, and we didn’t want to pay rent forever,” Delgado said. “It’s why we uprooted our family to come to Texas from California, leaving our family and everything behind. Always keep the big picture in mind.”