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What to do if your mortgage application is denied

What do you do if your mortgage application is denied? Increase your chances of getting approved for a mortgage with these five basic steps.

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Hearing no hurts. It can hurt even more if you can't get your dream home because you don't qualify for a loan. The good news is there are steps you can take to prepare for that future home purchase.

1. Find out what happened.

By law, you should receive a denial notice that details why you were declined. If you're unclear about anything, then ask your loan officer for more information.

2. Check your credit.

Your credit score is something a lender looks at to see if you qualify for a loan. Many lenders require a minimum credit score, regardless of how much you make, your debt or how much you have in savings. If you have some bumps and blemishes on your credit, there are ways to improve it.

First, pull a copy of your credit report. Review the report carefully and contest any errors or items you don't recognize. Just understand that anything being contested must be resolved before you would see an impact to your credit score.

Then look for ways to raise your credit score. A big portion of it comes from paying bills on time, every time. Setting up automatic payments can help you stay on track.

You should also pay attention to your credit utilization ratio — how much you owe compared to how much total credit you have. Carrying high balances near the limit on credit cards can significantly lower your score.

Be careful with closing accounts. Your specific situation may be different, but typically you want to keep existing lines of credit open. Closing old cards, even those with a $0 balance, increases your credit utilization and may hurt the average length your accounts have been open, which is another factor in your score.

3. Lower your debt.

All things being equal, having lower balances on car loans and credit cards will help you in the qualification process. Generally, borrowers with more debt represent higher risk for lenders. Paying down debt also lowers your credit utilization ratio and will likely improve your credit score. A lower debt-to-income ratio is more attractive to the lender because it represents lower risk.

4. Document your income.

You may not be able to do a lot to grow your income right away, but depending on your unique circumstances, there may be some things you can do to help you qualify for a loan.

Documenting your income can be somewhat tricky, and lenders use different calculations for different types of income. If you're self-employed, it's important to understand that lenders base decisions off the documented income you have, typically your tax forms. If you show a business loss, that will be factored into your income calculations. If you have irregular income, such as bonuses, they typically look at the average over the last two years. So, if you had a bonus last year only, waiting until next year's bonus may help that money count more fully toward your total income.

5. Increase your savings.

Buying a home takes money. The more money you put down on the home, the lower the risk for the lender. A larger down payment can help you qualify for a lower interest rate and could leave you in better financial shape after moving in.

Lenders may analyze all your assets, even beyond your down payment and the money needed for closing costs. Not all assets are easily accessible. Lenders often look for liquid assets — those you can easily get to — such as checking accounts, savings accounts, money market accounts, stocks and mutual funds.

For the money in your accounts to be counted toward qualifying, it needs to stay there for at least two months or longer depending upon the lender's guidelines. This helps lenders make sure people aren't temporarily moving money from friends or relatives just to qualify for the loan.

Building your savings doesn't have to be hard. It's easier when you do it automatically every time you're paid. You may also want to make a house payment to yourself for the monthly amount you plan on spending. For example, if your current housing cost is $1,200 per month, and you want to get in a home that costs $1,500 per month, save the extra $300 now so you'll be used to the higher payment.

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