Reader question: “We were denied for a mortgage loan because the lender’s underwriter said we had too much debt based on our annual income, or something to that effect. But I still feel like we are strong borrowers by all accounts. We’ve never missed a payment on anything in over a decade. I’m just wondering, how soon can you apply / reapply for a mortgage after being denied?”
You can apply for another mortgage loan tomorrow, if you want. Being denied by one lender does not necessarily make you “damaged goods” with all other lenders. In fact, it’s common for borrowers to be turned down by one company only to be approved weeks later by another. It happens all the time.
Much depends on the reason for the denial, and whether or not that factor is a commonly used criteria across the industry.
Case Study: Apply, Reapply, Eventually Get Approved
Let me give you a personal example. My wife and I once applied for a mortgage loan through Bank of America. We went through the entire application and documentation process, after which the loan officer told us we were approved. I still remember the email we received from her. It said something to the effect of: “Congratulations! Your application has been approved.” In reality, not so much.
It turned out that Bank of America’s underwriter had an issue with our cash reserves, or lack thereof. They had a rule that required borrowers to have several months worth of mortgage payments in the bank, at the time of closing. We were not told about this requirement at any time during the application process. So it came as quite a surprise when the underwriter raised the issue.
We had excellent credit scores in the low 800 range. We had good jobs and plenty of money for a down payment and closing costs. But we did not meet the lender’s cash-reserve requirement. So the loan fell through about 15 days before we were scheduled to close on the house.
Getting back to your question: How soon can you apply or reapply for a mortgage after being denied? In our case, we applied with another lender just two or three business days later. The new loan officer looked at our credentials and shook his head in bafflement. He could not figure out why Bank of America would deny such “highly qualified borrowers,” in his words.
Long story short, we were approved the second time around and ended up paying less in closing costs, as well. Bonus!
You mentioned your debt-to-income ratio as being the reason for your recent mortgage denial. This is another area where lenders have some leeway when approving borrowers for loans. Some lenders set a firm cutoff point for DTI ratios, regardless of the borrower’s other qualifications. Other lenders look at the bigger picture and make exceptions for what they feel are well-qualified borrowers.
You didn’t say what your DTI ratio is, exactly, so I can’t speculate on your chances of getting approved when you apply for another loan. But you can certainly reapply for a mortgage after being denied — as soon as you want. There is no mandatory waiting period.
Find Out Why You Were Denied the Mortgage
It’s important that you find out exactly why you were denied for a mortgage. In some cases, lenders are required by law to disclose this information. For instance, when a borrower is turned down for a loan based on his/her credit score, the lender is required to provide an “adverse action notice” that explains the reason for denial.
According to the Federal Reserve’s website:
“If the lender used your credit score in any way in making its decision to grant credit, you will receive an Adverse Action Notice. This notice must provide your credit score and any related information.”
In other cases, the lender may not be required to tell you why you were denied. But they should still tell you. It’s not like a state secret or anything. It only makes sense for the mortgage company to tell you why you were turned down, and what you can do to increase your chances of approval the next time you apply. They want to approve borrowers as much as the borrowers want to be approved. It’s how they make money. So come right out and ask them: “Why was I denied for a mortgage, and what can I do to fix the situation going forward?”
Summary: How soon can you apply for a home loan after being denied? As soon as you want. There is no rule or regulation preventing you from reapplying elsewhere. But you need to find out the specific reason for the rejection, and make whatever changes are needed to improve your chances for an approval. Most importantly, you should realize that different lenders have different standards and procedures. The experience I shared earlier is a prime example of this. So don’t hesitate to take your business elsewhere, especially if you feel you’re a well-qualified borrower in all other respects.