A strong credit score can be a key to access credit for a home, a car, vacation, a needed repair or clothes. Fair Isaac Corp. (FICO) calculates these grades by such factors as the amount of your debt, whether you pay on time and how often you ask for credit. Because mortgage lenders look to more than just FICO, your credit score does not take a hit from being turned down for a mortgage. However, a rejection can signal that your FICO needs improvement and can spur you to take action to get credit healthy or find help on your path to home ownership.
Rejection Doesn't Cost Points
You don't lose points for a rejected mortgage application. FICO does not know if you have been turned down. Also, your lender may turn you down for reasons FICO does not use in scoring you. Poor or erratic work history and low income may hurt a mortgage application. Lenders want to see you have steady income. In fact, to qualify for many loans, your mortgage payments cannot exceed 26 percent to 28 percent of your income. However, FICO does not look at what you make or bring home or how long you have stayed at a job.
High Number of Applications
FICO might nip a few points if you have applied for many mortgages in a short time. A mortgage or credit card application generates a "hard" inquiry from the lender or credit card company into your credit history. Several of them can make you appear a greater credit risk because you are relying too much on credit. According to FICO, those with at least six inquiries are eight times more likely to run to bankruptcy.
A rejected mortgage can be your wake-up call to reduce your debt. Smaller debt means better credit grades because you are less likely to be maxed-out on many cards. FICO bases 30 percent of your score on your how much debt you have compared with your credit limits. Mortgage lenders decide whether to qualify based on your debt-to-income ratio, which represents the total of your existing debt, such as credit card debts and car loans, and your anticipated mortgage payment compared to your pre-tax income. Generally, programs under the United States Department of Housing and Urban Development do not allow your existing debt and the mortgage payment to exceed 43 percent of your income.
Improve Your Credit Score
Turn rejection into a reason to tend to your credit record. FICO advises that you check your credit report for errors that might falsely lower your score. Get a free credit report each year from annualcreditreport.com. Improve your payment history, which accounts for 35 percent of your FICO credit score. Use your computer or smartphone to receive payment alerts or enroll in automatic payments if you only care about making the minimum payments.
Getting a Home Loan
Poor credit and past rejection do not have to keep you out of a home. The Federal Housing Administration assists many striving to own a home through easy credit qualifying, low payments and low down payments. FHA-backed loans allow many with credit problems to qualify for a loan because FHA will protect the lender if you miss payments. These mortgages only require you to put down 3 percent of the home price. You can also strengthen your credentials as a loan applicant. Stay at the same job or in your field for at least five years, unless a better paying job comes along.
- Consumer Reports: Credit Scores
- MyFico: What's Not in Your Score
- MyFico: Credit Q & A: What are Inquiries and How Do They Affect My Credit Score?
- United States Department of Housing and Urban Development: HUD 4155.1: Chapter 4: Section F: Borrower Qualifying Ratios
- MyFico: Credit Education: How to Repair Your Credit and Improve Your FICO Credit Score
- United States Department of Housing and Urban Development: Let FHA Loans Help You
- MyFico: What's In Your Credit Score
- United States Department of Housing and Urban Development: Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Unit Mortgage Loans
- United States Department of Housing and Urban Development: Homebuying: Common Questions for First-Time Home Buyers
- Consumer Finance Protection Bureau: I Applied for a Mortgage Loan and My Lender Denied My Application: What Can I Do?
- MyFico: Sample Credit Report Dispute Letter
- Annual Credit Report: Index
- United States Department of Housing and Urban Development: Housing and Mortgage Financing Agencies
- United States Department of Housing and Urban Development: FHA Lender List
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.