What Happens if Your Home Loan Is Denied at the Underwriting?

Everything you want to accomplish with a home loan will be only a dream if you don’t get approved. A bank underwrites your loan application to minimize its risk in lending you money. It wants to see that you can afford the payments and that you have enough collateral to secure the loan. If you get denied, contact the bank to assess your options.

Reasons for Denial

First, you need to understand the reasons for your denial. The bank is required to notify you of its decision within 30 days of submitting your application. It does this using an adverse action notice. You will receive a copy in the mail and it will detail the reasons for the declination. Common reasons include poor credit history, insufficient income, excessive debt and insufficient collateral. Read the notice thoroughly as it will let you know what factored into the decision. It will also detail how you can contest the denial if you choose.

Counteroffer

Sometimes, an adverse action notice isn’t a full denial. The bank may determine, based on your income or collateral, that you qualify for a loan, just not in the amount you applied for. It will note this on the adverse action notice. The document will say, for example, that you applied for a $100,000 loan, but the bank is offering you $50,000 instead. You can choose to accept this offer, decline it, or contest it. If you feel the bank has made an error in its calculations or relied on faulty information, contact your loan representative to clarify the situation.

Improve Your Situation

If you’ve been declined for legitimate reasons, getting a loan isn’t likely in your near future. The best thing to do at this point is to try to improve your situation. Live on a budget and work to pay off your debt. This will not only improve your debt-to-income ratio, but your credit score as well. Obtain a copy of your credit report from the Annual Credit Report website. Review it for inaccurate or stale-dated information. Use the contact information in the report to clear up any discrepancies. The cleaner your credit profile, the better your chances of getting a loan when you reapply.

Shop Around

Different lenders have different criteria. Just because you were denied at one bank doesn’t mean you won’t be able to get a loan elsewhere. Contact other lenders to assess your options. If you’re lucky, you’ll find one with less restrictive underwriting guidelines. Some lenders will give loans to riskier clients, but at higher rates. If you find yourself in this situation, weigh your need for the loan against the costs you’ll incur.

About the Author

Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.