How to get approved for a mortgage in 2021 after getting rejected

If you've been denied for a mortgage in the past, that shouldn't stop you from trying to buy a home later down the line. With mortgage rates currently so low, you can follow these steps to improve your chances of qualifying for a mortgage in 2021. (iStock)

Current mortgage rates are very low making now a perfect time to apply for a mortgage if you’ve been wanting to buy a new home. If you’ve been rejected for a mortgage in the past and are cautiously considering the idea of applying for a home loan again, you’re not alone. At least one in every nine home loan applications was denied in 2018, according to the Federal Bureau of Consumer Financial Protection.

If you’re looking to get approved for a mortgage in 2021 after getting rejected, your first step should be to address why you originally got denied. To see if you qualify for a mortgage based on your current credit score and salary, head to multi-lender marketplace Credible.

Why you might get rejected for a mortgage

You can get rejected for a mortgage for a number of reasons. Bad credit or poor credit history is one of the top reasons why lenders might not approve you for a mortgage. Another reason is having too much debt. Lenders use something called a debt-to-income ratio or DTI to determine how much monthly debt payments you have compared to your take-home income.

Your debt-to-income ratio is calculated by dividing your monthly expenses into your gross monthly income. For example, someone with a gross monthly income of $3,000 but a credit card with a minimum monthly payment of $25, $375 car payment, and a $1,100 projected mortgage payment would have a 50% debt-to-income ratio.

  • Expenses = $25 + $375 + $1,100 = $1,500
  • Income = $3,000
  • DTI: $1,500 / $3,000 = 50%

“Some investors would consider this debt-to-income ratio too high while others may be perfectly fine with it,” said Johnny Jozwiak, a loan originator with Wintrust Mortgage. “A lower debt-to-income ratio may open the door to more loan products that are available to you based on lender guidelines.”

Jozwiak went on to say that getting denied shouldn’t scare potential buyers from exploring the housing market again.

“With interest rates as low as they are these days, it doesn’t hurt to see where you stand in regards to qualifying for a mortgage,” Jozwiak added.

How to get approved for a mortgage after getting rejected

1. Boost your credit score

A good credit score tells lenders that they can trust you to repay your debts. With a mortgage often becoming a sizeable amount of debt, maintaining a good credit score is one of the best things you can do to make sure you get approved this time around.

Your credit score is typically one of the first things lenders look at when considering you for a loan. To ensure you're staying up-to-date with your credit status, enroll in a credit monitoring service. Credible can help you get started.

Start by checking your credit report online for free. Make sure all the information is accurate and that there are no open accounts you don’t know about. If you find errors or discrepancies in your credit report, be sure to file a formal dispute with all three credit bureaus to clear things up.

Then, focus on the five key factors that impact your credit score. They are:

  • Payment history
  • Amount owed
  • Length of credit history
  • Credit mix
  • New credit (accounts)

The two most important factors are payment history and amount owed or total credit utilization and they make up at least 65% of your score. This means one of the best ways to boost your credit is by paying your bills on time and keeping your debt balances low.

2. Pay off existing debt

Paying off existing debt can help improve your credit score and also lower your debt-to-income ratio. If you have maxed out credit cards or high loan balances, develop a plan to help you pay down some of your debt to free up more disposable income. As a general rule of thumb, try to keep your credit card debt below 30% of your limit and pay off the balances in full each month if you can.

If you are at the point where you’re overwhelmed with high balances on your high-interest credit card debt, consider consolidating this debt with a personal loan. This will allow you to turn multiple monthly payments into just one payment with a lower interest rate. Visit Credible to compare rates and lenders for personal loans that can be used to help you pay off your debt faster.

3. Save for down payment and closing costs

While you don’t always need to put 20% down, you should still save money for a down payment and closing costs. During the application process, your lender will review bank statements and look at your savings to see if you can afford to close on the home and cover any unexpected expenses.

While you may be able to negotiate with the seller to cover some of the closing costs, this is not guaranteed. It’s safer to save the 3% to 6% of the purchase price recommended for closing costs so you can afford those final expenses without spreading yourself too thin.

Next steps

Don’t give up on your dream of becoming a homeowner even if you’ve been denied a mortgage in the past. Find out why you got denied in the first place and focus on cleaning up your credit and lowering your debt-to-income ratio. Explore mortgage options and rates you may qualify for by visiting Credible and comparing lenders. Credible also provides a free mortgage calculator you can use to see how much home you can afford and what your monthly house payment would be.