How to Challenge a Mortgage Denial

Mortgage approval doesn't always happen on the first try.

Mortgage approval doesn't always happen on the first try.

If a lender didn't approve you for a mortgage loan, according to federal law, the denial letter you receive has to tell you specifically why. Whether you're denied for not having enough income, owing too much debt, credit problems or a low home appraisal, once you know what's wrong, you can work on ways to fix it. Just because you didn't meet the lender's standards for loan approval on the first try doesn't necessarily mean that home ownership is out of reach.

Ask the seller to pay some of the closing costs and if he agrees, show the lender a signed copy of the purchase contract stating the dollar amount that the seller is willing to pay. This can help get you the loan if the lender determined that you didn't have enough cash available to cover all the closing costs.

Accept a gift from a family member -- and let the lender know that you are going to use the gift check toward your down payment. This will bring down the amount of the loan -- and you then might qualify if you were denied because you couldn't carry the loan on your income. You must show the lender a gift letter and a copy of the check for the exact amount of the gift indicated in the letter. The letter needs to state that the money is a gift and not a loan.

Ask the lender to consider bonuses, commission payments and any overtime you will receive if you didn't include this income when you first applied. These earnings might give your application the boost it needs if you were denied a mortgage loan for insufficient income. Let the lender know, too, if you're expecting a pay raise in the near future. Be prepared to document any additional income you include.

Talk to the lender about paying down your credit card balances if having too much debt is why your loan application was denied. Ask if the lender will reconsider you for the loan if you pay off some of your revolving debt or a small installment loan. This will likely lower your debt-to-income ratio -- and could qualify you.

Explain to the lender the reason for any late payments that show up on your credit report. Put your explanation in writing if delinquent payments and a low credit score are why you were denied a mortgage loan. According to a 2011 article on the CNNMoney website, most mortgage lenders require a minimum credit score of 620 to qualify you for a loan. However, a lender might still consider you for a loan if you made late payments due to circumstances beyond your control, such as loss of a job as a result of downsizing, but had good credit before then. Another thing that might work in your favor is if you've kept up with your payments after resolving the problem that prevented you from making payments on time.

Ask for an appraisal rebuttal if the initial appraisal comes in low. However, Bankrate.com notes that while you can ask for a rebuttal, most of the time, the review does not result in a higher appraised value. If that's the case, try negotiating with the seller to lower the sale price on the home. The lender might approve your loan if you can get the seller to agree to a price closer to the current market value of similar homes in the area.

Tip

  • A gift letter should include the address of the property you're buying, as well as the name, address, contact information and relationship of the relative gifting you the money.
 

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