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.
What If You Are Having A Hard Time Qualifying?
If you find that you are having a rough time trying to
qualify for the loan you want 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 badly enough there are
usually steps you can take to see your dream come true.
Possible Causes For Rejection And Your Alternatives
Appraised Value Too Low
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. 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 just 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 that there is a problem with the
appraiser. Maybe he is not familiar with the values of
properties 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 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.
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 in the
long run the lender may be doing you a favor by preventing you
from getting yourself in a financial situation that may be over
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.
If you feel confident that 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. Just be sure
that 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.
What if your credit is not in the best shape?
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. TRW offers one free report per calendar year per person. Go over the report and check for errors.
It is not that unusual for there to be errors on a
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 the 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
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 the seller assist with financing? Sellers can
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 getting loan approval. Go over what you can do to make
yourself more attractive to lenders. Once these things are
addressed and corrected you should be in a much better
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 if
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 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.
Too Many Debts
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.
Alternatives For Low And Moderate Income Homebuyers
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.
A Rejection Is Not Your Last Chance
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.