Introduction

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.

Inadequate Funds

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.

Insufficient Income

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 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, 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.

Self–Employment Income

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 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 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 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.

Other Strategies:

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 situation.

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.