If you have been denied a mortgage or mortgage preapproval, you are not alone. The Wall Street Journal’s MarketWatch reported that 11-33% of applicants were rejected by the 10 largest mortgage lenders in 2012.
But would-be borrowers rejected by one lender can often get approved by another. To qualify for a mortgage the second time around, take these steps:
Ask the lender why your mortgage application was denied
Find out the reason for the mortgage loan rejection. Ask for specifics, which may not be covered on a standard disclosure. Don’t accept vague responses such as “you didn’t meet our minimum requirements.” Instead, learn if your debt ratios were too low for the lender’s guidelines, for example.
According to the Federal Trade Commission (FTC), you have the right to know why you were turned down. Further, “the creditor must tell you the specific reasons for the rejection or that you are entitled to learn the reason if you ask within 60 days.”
Using this information, take steps to meet minimum standards or find another lender with less stringent requirements.
Correct credit problems
If you have not already pulled your credit reports, now is the time to request them. Visit AnnualCreditReport.com and ask for reports from the major credit reporting agencies, Experian, TransUnion, and Equifax. Verify the accuracy of information and correct any errors.
Reduce outstanding loan balances
Pay down debt so your loan balances won’t lock you out of a mortgage approval.
Lenders consider how much of your monthly income will be consumed by debt obligations using a back-end debt-to-income ratio (DTI). They calculate this ratio based on your anticipated mortgage payments along with monthly bills for credit card debt, auto loans, student loans, etc. If you reduce or eliminate balances, your DTI will drop — as long as you don’t take on new debt and your income remains stable.
In addition, if you pay down balances but maintain your lines of credit, your debt utilization ratios should decline, possibly boosting your credit score.
A more attractive DTI and credit score can help you qualify for a mortgage loan.
Look at the property appraisal
The reason for the mortgage denial may have been the appraised value of your property, compared to the loan amount. If the value is lower than expected, then the loan-to-value ratio (LTV) may have failed to meet your lender’s standards.
For example, your lender may require an LTV of 95%. A $10,000 down payment on a $200,000 house should give you the desired ratio ($190,000 loan / $200,000 value = 95% LTV). However, if the appraised value comes in at $195,000, then your loan-to-value ratio is 97.4% ($190,000 / $195,000 = 97.4%). In this scenario, the mortgage is denied because the LTV is too high.
To qualify for a mortgage, reduce your LTV to the desired level. You might increase your down payment or negotiate a price better aligned with the home’s value.
Find a new lender
Locate lenders that will work with you to get approved for a mortgage loan.
Talk with potential lenders about their requirements or work with a mortgage broker who has relationships with multiple lenders and knows their rules.
Note that even though certain mortgage lenders may meet federal requirements, some have less stringent rules than others. In addition, guidelines change over time. Further, some lenders may have more experience in underwriting credit for special circumstances, such as approving mortgage loans for the self-employed.
Choose a lender with programs that fit your needs. Make sure you meet your desired lender’s standards, whether you need to have a certain DTI, LTV, or other qualification.
Getting denied for a mortgage loan seems devastating. But straightforward updates to your financial status can allow you to get approved the second time around.
