Mortgage Application Rejected? What to Do Now

A mortgage application is an application you need to fill out in order to be considered for a mortgage. The mortgage lender will look at your income, credit history, your current debt obligations, family status and the location of the property for which you hope to get the mortgage, among other things. Before it gives you any money, the lender must be reasonably sure you can repay it--otherwise, it will reject your mortgage application. Once this happens, there are several things you can do that may allow you to buy a home in the future. The most significant options are explained below.

Improve Your Finances

Just because you were rejected when you applied doesn't mean you will keep getting rejected in the future. As mentioned above, the mortgage lender's rejection is largely based on your financial history. If you take steps to improve your credit score, mortgage lenders will be more inclined to accept your mortgage application the next time you apply.

You can improve your credit score by repaying the existing debt and making sure all your bills are paid on time. You should also get a copy of your credit report and check it against your own records to see if it has any mistakes. Under the federal law, you are allowed to request one free copy of your credit report per year. If you see any errors, contact the credit reporting agency that compiled it and get it corrected as soon as possible.

It is worth noting that it will be several years before your credit score changes noticeably enough to increase your chances of getting your mortgage application approved. The more debt you owe, the longer it will take.

Consider FHA-Backed Mortgage Loans

If you are unable to get a mortgage from a private lender, you may be able to get an FHA-backed mortgage. The FHA-backed mortgage loans are private loans insured by the Federal Housing Authority. This allows mortgage lenders to lower their credit score requirements, which, in turn, allows you to apply for mortgage loans that you would not be able to qualify for on your own. You also benefit from more generous terms. With an FHA-backed mortgage loan, you can borrow up to 97 percent of the home's value. Once you pay back 78 percent of your FHA-backed loan, you will no longer have to pay premiums.

In order to qualify for an FHA-backed mortgage loan, you must be able to meet FHA loan requirements. Your credit score can't be lower than 620, you can't owe any tax lien payments and you must be able to prove that you had a steady job with steady income for the past two years.

If All Else Fails, Rent

Depending on your financial situation, you may be better off sticking to renting. While owning a home affords you flexibility you won't get with a rented apartment, renting is cheaper in the long run, especially if you live in an urban area. In the current (2010) real estate market, your renting options are more varied than ever. You might as well take advantage of that.

Some landlords may offer you an option of signing a rent-to-own contract. This contract allows the landlord to take a portion of your rental payments and use it towards the purchase of the space in question. Such contracts aren't necessarily a bad idea, but you must make sure you carefully read all the terms before you sign one. You must make sure that you can afford to pay the rent and that you are ready to pay the home-related expenses once the rental period expires and you become the owner of the property.

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