 WHAT
HAPPENS IF MY 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 in the future. The following information helps you
understand the most common reasons for loan denials and
corrective measures you can take, and it describes some
alternatives that exist especially for low and moderate income
home buyers.
One of
the factors considered by the lender is the ratio of the 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.
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.
Based
on the financial information 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, but a 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 payments), 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.
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, and 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
well beyond industry norms and can cause denial of the loan.
Sometimes,
particularly if your credit card 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 have changed since the 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 card
issuers' debt 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.
Nothing
can be more damaging to your loan request than a history of
poor debt repayment practices. If the credit report shows
frequent late charges, past due accounts, judgments or
bankruptcy, chances for approval of the loan are slim. Lenders
may stretch their guidelines on debt ratios or income
requirements, but have little tolerance for a bad credit
record. Even low loan-to-value ratios and debt ratios cannot
offset an unsatisfactory credit history.
If
your loan is turned down because of a poor credit report, you
may request a free copy of the report from the credit report
company, which will be identified in a notice from the lender.
Examine the credit report carefully to see if it is up to date
and accurate. The credit bureau must correct any errors in the
report. If there are unsettled disputes over certain accounts,
it must also include your side of the argument in the report.
Even if the name on the report seems to be you, make sure all
of the accounts and references apply to you. Many people have
the same name and improper recording of data occurs.
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.
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 usually find them in the phone book in the blue
government listings under Housing.
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 groups. 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 to the lender.
The fact
that a lender has rejected your loan application does not mean
that you are denied home ownership forever. As has been
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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