If Your Mortgage Loan Application Is Rejected
The joys and anticipation of owning a new home are sometimes crushed when the
application for mortgage financing is turned down by the lender. If your loan request has
been denied, you should understand why the loan was denied and what steps you can take to
correct the problem or make sure that it does not happen again.The following information
will help you understand the most common reasons for loan denials and corrective measures
you can take. It also describes some alternatives that exist, especially for low and
moderate income home buyers.
If you find you are having a rough time trying to qualify, there are several things you
need to look at. It can be discouraging to find that you are having problems with loan
qualification, but try not to let it get you down. If you really want to own a home,
there are usually steps you can take to see your dream come true.
One of the factors considered by the lender is the ratio of loan amount to the
sale price or the appraised value of the property, whichever is lower. If the appraisal on
the property is substantially lower than the purchase price, the loan-to-value ratio, or
LTV, may be higher than the lender will, or can legally, approve. If you have applied for
a maximum loan amount, 90 to 95 percent of the purchase price a low appraisal may make
your requested loan too large. Your alternatives in this situation will depend upon the
reasons for the low valuation. Did you and your Realtor underestimate the value? In that
case you should be glad that the appraiser has caught the low value for you.
If the value is low because the property needs major repairs such as a new roof, you
can use the appraisal as a tool to renegotiate with the seller. If the seller won’t
renegotiate you should look elsewhere. While you’re at it, you might want to look for
a new real estate agent too. If this one encouraged you to pay too much money for a
property, they may not be familiar with the current values in that area.
If the purchase price is simply higher than the prevailing prices being paid in the
general area, you can try to renegotiate the price with the seller down to a level more in
line with the market and one which the lender would accept in order to approve your loan.
If this is not possible, your only other solution is probably accepting a lower loan
amount, assuming you have sufficient funds to cover the additional down payment.
It is also possible there's a problem with the appraiser. Maybe he is not familiar with
property values in your area. Find out if the appraiser has done very many appraisals in
that area. Check the appraisal comparables and see if they are good representations. The
lender should be familiar with the appraiser and be able to provide you with information.
Your Realtor should also know appraisers for that particular area who might be able to
give you an idea of reasonable value for a reduced fee.
Based on the financial information provided and the Verification of Deposit, the lender
may have determined that you do not have enough cash to make a down payment and cover
closing costs. Usually, these funds may not come from borrowing, however gift from a
relative can be used as long as no repayment of the money is expected. Other solutions
include getting the seller to take back a second mortgage, which would reduce the down
payment requirement (assuming you can still qualify with the additional loan payment), or
getting the seller to pay some of the closing costs, such as the origination fees.
Finally, you could correct this problem by simply waiting, providing you institute a
savings program in the meanwhile.
It can be difficult to hear that a lender feels you have insufficient income to qualify
for your loan. Looking at it from a different perspective however can show you that the
lender may be doing you a favor by preventing you from getting yourself in a financial
situation that may be over your head.
In assessing your ability to repay the requested loan, lenders look at the amount of
your monthly income in relation to your proposed mortgage payments and to all of your
monthly debt and installment loan payments. Generally speaking, your mortgage payment
should not be more than 28 percent of your monthly gross income.Your total debt, including
mortgage payments and other installment payments, should not be more then 36 percent. The
percentages are slightly higher for FHA loans. These ratios are only guidelines, but if
yours are substantially higher, say 35 percent and 42 percent, they are beyond industry
norms and can cause denial of the loan. If you feel confident you can afford the home you
want to buy there are some things to look at to help you get your loan approved.
Income from self-employment must be stable and continuous for at least the previous two
years. Your tax returns need to reflect this. If you can demonstrate that you have been
successful in a similar business or activity prior to becoming self-employed (e.g., you
were a sales person and started your own marketing firm), the lender may consider a
shorter term of self-employment. If you have low income due to being self-employed and
declaring large business expenses, be patient. In a year or two you could easily be taking
in more income and making the adjustments needed on your tax returns to reflect all your
income. You also might want to look at a no income verification loan. For this type of
loan however you will usually need to put down a larger down payment. You also can expect
to get a higher interest rate for this loan.
You might also consider having a relative who is in a good financial position co-sign
the loan with you. Be sure you recognize that if you have problems with the payment you
will not only be harming your credit but their credit too. You are also agreeing to allow
them ownership interest in the property. It is possible for them to Quitclaim their
interest in the property at a later date. They should realize however, that they are now
liable for a loan in which they have no legal interest at all in the property.
The first thing to do is to face the fact that there may be problems that will show up
on a credit report. If you haven’t seen a copy of your report recently you need to
obtain a copy. Go over the report and check for errors. It is not that unusual for there
to be errors on a credit report.
If information appears which is not yours, contact the credit bureau to have the
information removed. If one of the creditors noted on the report has reported incorrect
information to the bureaus, you will need to contact that particular creditor and request
that they correct the report.
To remove erroneous information from your report you will need to be persistent. By
law, credit bureaus are supposed to respond to you within 30 days. If the customer service
representative at the credit bureau is not properly helping you, ask to speak to the
supervisor. If you still don’t get satisfaction, you can also contact the Better
Business Bureau. Keep in mind though, that a credit bureau can’t change information
that is being reported accurately.
You can also enter a statement of contention on your credit report. That way if a
perspective creditor pulls your report they can also see your side of a story. You should
always try to have the disparaging information removed first, if you can.
Can the seller assist with financing? Sellers may sometimes be more forgiving when
checking a credit report.
Continue to rent and buy yourself some more time. You can then save additional funds
needed for the down payment and obtain additional credit sources, if needed.
Sit down with a loan officer if you are having problems obtaining loan approval. Go
over what action should be taken to make yourself more attractive to lenders. Once these
things are addressed and corrected, you should be in a much better position to borrow.
If you have been declined for a loan because you have too much existing debt, be
grateful. Carrying too much debt would eventually hurt your ability to save and live
within your income. Should you have cash available to pay off debt, you should do so. If
you can do this before you even apply for the loan, so much the better.
If the adverse items on the report occurred because of illness, marital problems, job
layoff or other temporary circumstances and were confined to a particular period of time,
you should have provided the lender with a written explanation at the time the loan
application was taken or at some other point in the process. If you didn't do it then, do
it now. Assuming there has been sufficient time since the problems occurred for you to
regain financial stability and demonstrate prompt payment of your obligations, there is a
good chance the lender will reconsider the loan request. Many lenders look for one year's
clean payment record to offset past credit problems. If the credit report is accurate and
you have a questionable credit history, you need to start repaying outstanding balances on
time in order to re-establish an acceptable record. It may take time, but there is no
alternative when this problem stands between you and owning a home.
Sometimes, particularly if your credit record is very good, if you can show that you
are already carrying that much housing expense through rent or mortgage payments, you may
be able to convince the lender to reconsider. This is an example of why full and accurate
disclosure on the loan application works in your favor, even though it may not be obvious
at the time.
If your personal circumstances change after submission of the loan application let the
lender know. An impending salary increase or bonus or new employment, for you or your
co-borrower, may improve the financial picture presented on the application. These
changes, of course, will need to be documented and verified before the lender will
reconsider the loan request.
In some cases, it is not only the amount of debt owed by an applicant that
prevents qualifying for the loan. Extensive use of numerous credit cards and revolving
accounts with evidence of increasing account balances that are close to the limits may be
enough to kill the application. The primary solution to this problem is to pay off some of
the accounts to bring down outstanding obligations, as well as the number of creditors.
Many lenders participate in housing programs designed for low and moderate income home
buyers who would not qualify for home loans under standard lending requirements. These
programs are sponsored by both governmental and private organizations. If you have a good
credit history, or have not established a credit history at all, they may provide a source
of financing for your home purchase.
Primary sources of special, low income housing programs include state and local housing
finance agencies, non-profit housing assistance groups, the Department and Housing and
Urban Development (HUD) and secondary mortgage market operations such as the Federal
National Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage Corporation (Freddie
Mac). Your lender should be able to tell you how to contact local offices of
organizations which work directly with borrowers or you can find them in the phone book
under government listings.
Assistance for low and moderate income home buyers is not only based on direct
subsidies but also on relaxation of standard loan approval requirements. For instance,
many low income families spend a greater percentage of their income . If you can show that
you have consistently handled such higher payments and have a good credit record, the
lender might approve the loan based on higher debt ratios.
Some potential home buyers have trouble getting a loan approved because they have not
established a credit record. There is nothing adverse on the credit report but there is no
record of prompt repayment of loans or charge accounts. If this is your situation, you may
be able to qualify based on what is called a "non-traditional credit history."
Using this approach the lender will depend on utility companies, past and present
landlords and other sources which can verify that you have met a regular payment
obligation in a timely, consistent manner. If you think such an approach might help you
and the lender has not mentioned it, suggest it.
The fact that a lender has rejected your loan application does not mean that you are
denied home ownership forever. As discussed earlier, there are positive steps you
can take to correct the problem. Some problems may be resolved very quickly while others
may take longer, but you can turn around most problem situations. Take the time to
determine exactly why your loan request was denied and then take steps to eliminate the
cause of rejection.
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