Can't qualify for a home loan? Try a different lender

Did you receive a thumbs-down on your home loan application? Don't let that rejection get you down. Your dreams of homeownership may not be over.

As an aspiring homeowner, you shop around for a home, so why not do the same with lenders? A mortgage application that garners a resounding "no" from one lender may get an enthusiastic "yes" from another.

Shopping around for a home is extremely important for borrowers, as what one lender will not approve may not be an issue with another lender, says Hillary Legrain, a loan officer at First Savings Mortgage in Bethesda, Maryland.

“[Your lender] can affect how an entire transaction is structured,” she says.

So don't take "no" for an answer on your home loan. Instead, shop around. Read on for four solid reasons  why you shouldn't settle on the first lender you meet.

1. Mortgage Lenders Are Easing Rules to Get More Business

Has your far-from-perfect credit score or low down payment stood in the way of your home loan approval? As the saying goes, "if at first you don't succeed, try, try again" - and this is an opportune time to do so. After all, with mortgage applications down, lenders are letting up on the rules to compete for business, says Legrain.

For example, some lenders have lowered their minimum down payment for conventional loans from 5 percent to 3 percent, which is the minimum standard of Fannie Mae, says Legrain. That difference translates into $6,000 less due up front as a down payment on a $300,000 home, which could make or a break the approval process.

And while many lenders are using less strict guidelines for underwriting, the way one lender looks at income and expenses for approval may differ from the way another does, says Mike Premny, broker and owner of Icon Capital Group in San Francisco.

[Ready to shop for a home loan? Click to find the right mortgage lender now.]

Your Credit Score Might Be Good Enough For Another Lender

A mortgage application involves providing lots of figures, but your credit score could be the one that determines whether or not you seal the deal. But what if your credit score was deemed unfit by a lender? Well, it may be worth the effort to seek out another lender, particularly one that offers FHA loans, which are insured by the Federal Housing Administration.

In general, credit score requirements are typically lower on FHA loans than on conventional loans, and they've only gotten lower since lenders want to be more competitive, says Jeremy Schachter, a mortgage advisor at Mortgage Loans Arizona in Phoenix.

How low? Well, FICO scores range from 300 to 850, and for many lenders, the minimum FICO score was 640 across the board on FHA loans, according to Schachter. However, he adds, "Many banks still have this requirement, but some go as low as a 580 FICO score."

The credit requirements for an FHA loan can be more forgiving, which makes purchasing a home possible for some homebuyers who would not be able to buy a home otherwise, says Premny.

"The FHA will accept lower scores and look at specific credit issues. They will look at and consider explanations regarding specific credit blemishes," he says.

Of course, this varies by lender, so don't let one lender's rejection extinguish your homebuying dreams. While some lenders may have their own stricter requirements, others have broader guidelines and thus a higher approval rate, adds Premny.

Debt-to-Income Ratios Vary by Lenders

Another factor just as important as your credit score is your ability to make your monthly mortgage payments. In order to gauge this, lenders calculate your debt-to-income ratio (DTI) by adding up all your monthly debt payments and dividing the sum by your gross monthly income before taxes.

In January of this year, the Dodd-Frank Act ushered in stricter regulations that all loans are now required to meet.  The industry refers to these home loans as "QM" or qualified mortgages. As a result, the debt-to-income ratio standard has become more stringent, but nonetheless, there are still exceptions, says Schachter.

"With the recent changes with QM or qualified mortgages, the debt-to-income ratios have tightened even more," he says. "For conventional loans, 43 percent debt-to-income is usually the drop dead number for an approval. In some cases, it can possibly go to 45 percent with compensating factors like a significant down payment, high credit score, and substantial liquid assets."

Of course, DTI requirements vary depending on the lender and program, so you should shop around and compare DTI standards.

[Ready to shop for a mortgage? Click to compare interest rates from multiple lenders now.]

Closing Costs May Impact Your Mortgage Approval

Closing costs may be an afterthought to many homebuyers, but they carry more weight in the mortgage application process than you'd think.

According to Schachter, closings costs can vary greatly from one lender to another. "One lender might offer a lower rate which might mean a 'yes' or 'no' on an approval [especially] if you are on the borderline of qualifying or not," he says.

Closing costs vary due to a number of reasons, including interest rates, says Schachter. "One lender might offer a lower rate, which in turn will reduce the debt-to-income ratio, but sometimes with higher closing costs," he explains.

Interest rates aren't the only variation with lenders. First-time homebuyer, Lindsay Pirkle of Charleston, S.C., says she is thankful she figured this out quickly.

"I think many buyers only pay attention to strictly the interest rate," she says. "They don't realize how high upfront fees are."

Pirkle says her quotes included fees for processing and underwriting. She wasn't alarmed to see those fees included in the proposals, but the different quotes she received from lenders came as a shock.

"The fact that quotes could range in thousands of dollars for the same interest rate and down payment was scary," Pirkle says. Shopping around and using referrals paid off for Pirkle, who says she was able to close for less than $3,000 compared to her original lender's closing cost of $7,000.

Schachter says fees can certainly vary for processing, doc preparation, and more depending on the lender. But he also notes that during this time of extreme caution on compliance, there should not be any surprises and that everything should be very clear and presented up front.

"These days, [fees and costs] have to be disclosed and redisclosed in a certain time frame before the borrower signs, or it is out of compliance," he says.