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.
