You handed over years’ worth of pay stubs, coughed up tax statements and provided bank statements. But it wasn’t enough — your bank rejected your mortgage application. Mortgage rejections are on the rise. The nation’s 10 biggest lenders turned down more than a quarter of loan applications in 2010, up from 23.5 percent in 2009, according to the Wall Street Journal. A loan denial isn’t the end of the road, though. With effort and time, you can turn a denial into an approval.
Lenders deny mortgage applications for several reasons, but home appraisals are tops among negative factors, says Mathew Carson, a mortgage broker with First Capital Group in San Francisco. Even if you meet income and credit guidelines, a home appraisal below the sale price hurts your loan-to-value ratio and can scuttle your application. Lenders also turn down an application if a home loan and other debt such as auto or student loans take up too much monthly income. Your mortgage payment should be 28 percent or less of monthly income, while all debt payments, including your mortgage, should be 36 percent or less of income. Borrowers who push those limits risk loan rejection.
If your mortgage got the thumbs-down, talk to your mortgage broker or lender to determine why your loan didn’t go through. Ask whether simple solutions could help your application woes. Federal law requires mortgage lenders to provide a written explanation of factors behind a rejection within 30 days of their decision. If a ding on your credit report caused the issue, you’re entitled to the name and address of the credit agency that provided the details.
Get a second opinion on your rejected home loan. All banks underwrite according to guidelines from federal mortgage backers Fannie Mae and Freddie Mac, but some lenders have additional, more restrictive criteria. Finding a lender with fewer extra guidelines could be the difference in qualifying. Also, ask your lender about applying for an alternative loan through the Federal Housing Administration, which has more lenient criteria. Or consider applying for a mortgage through a credit union or a small, local bank, because such financial institutions have more flexibility to work with borrowers. If the problem is a low appraisal, federal law doesn’t allow a new appraisal. However, your appraiser could reconsider his decision if you offer new evidence supporting a higher value, such as higher sale prices on surrounding homes. If the value is low because the home needs repairs, negotiate the price down with the seller. If you need a bigger down payment, borrow from a friend or family member. For iffy credit, ask a relative with stable finances to cosign the loan. The home’s seller may help with financing, without the stringent requirements of a bank. If debt-to-income ratio is the hurdle, a lender may reconsider if you have good credit and can show you’re already handling high monthly rent. If a raise or a better-paying job is on the horizon, give your lender documentation on the pending change.
You’ll need more time to reverse a mortgage denial based on poor credit or late payment. Start by paying down credit-card balances, student loans and other debts that hurt debt-to-income ratio. Pay all your expenses — from your electric bill to your car payment — by their due dates. Don't let past-due accounts go to collections. If your bank denied your loan based on incorrect information from a credit bureau, ask the agency in writing to remove the account from your report. If credit hiccups resulted from a temporary circumstance, such as job loss or divorce, explain the situation in writing and ask the lender to reconsider. Close credit-card accounts you don't use. Consider borrowing against your retirement account to pay down revolving loans or credit-card debt. Boosting credit history to qualify for a loan will take time: Banks want to see a year's worth of positive credit and on-time payments before they make a home loan.
Rejection odds the second time around drop if you follow a few ground rules. Carson warns against buying a car or any other big-ticket item while your application is pending, because a major purchase can hurt your debt-to-income ratio. Lenders want to know the source of deposits into your bank account, so the application process is easier if you limit multiple ATM deposits before and during underwriting. Avoid changing work status from a W-2 job to self-employment while the lender considers your application, because banks require two years of self-employment history to approve a loan. Apply for a new loan or to refinance before you change jobs. In addition, respond as soon as possible when your lender asks you for more information, no matter how difficult the request. The longer you take to provide details, the greater the odds you'll lose your rate lock or experience another rejection.
- Mathew Carson; Mortgage Broker; First Capital Group; San Francisco, California (415-440-5626)
- The New York Times: After a Rejection
- North Atlantic Mortgage Corp.: If Your Mortgage Loan Application Is Rejected
- MSN Real Estate: The Secret Life Of Your Mortgage Application
- Wall Street Journal: Tighter Lending Crimps Housing