Keep in mind
Be aware of people promising quick and easy solutions. They may qualify you for a different kind of loan, but pay close attention to the costs involved and do not give in to the temptation to grab the first loan simply because you will be approved.
Having your application denied is usually an unpleasant shock, but with a little time and effort, you will probably be able to deal with the problems that caused the denial. It is important to understand that the loan denial means that the lender is unable to approve your application with the facts they have at present time. Most lenders — if not all — hope to get your business if and when the problems have been addressed.
Find out the exact reasons
If your loan application is rejected, you will need to determine why, and then take steps to correct any problems or improve your ability to get a mortgage in the future.
Understand why the loan was denied
Lenders are required to explain in writing their decision to deny credit. Go back and talk to the loan officer to find out the specific reason why your request was rejected. You may be able to persuade your lender to reconsider your application. If not, ask for suggestions as to how you can improve your ability to get a mortgage. Additionally, you should not necessarily assume that a rejection by one lender means that other lenders would also reject your loan application.
Some possible reasons for a loan denial
You might try to get the seller to agree to finance a second mortgage, thereby reducing the amount of down payment required. Or, perhaps a family member would be willing to provide a gift of funds to be used in paying the closing costs. Are there down payment or closing cost assistance programs available to you? If all else fails, start a serious savings plan so you will be in a better position to buy a house in a year or two from now.
If the lender's qualifying formula shows that you can't afford the house you are proposing to buy, perhaps there are some extenuating circumstances that you might point out to the loan officer. For example, is the rent you are already paying as much as the proposed monthly payment? Are you due for a raise, which would make you eligible for the loan? Would a letter from your employer help?
Too much debt
Perhaps your existing debt is what's creating the roadblock, because it puts you outside the lender's qualifying guidelines. Again, if you are very close to qualifying, you may be able to convince the lender to reconsider, especially if you have an excellent credit history. Otherwise, you may need to pay off some of your debts before you can buy a house. Or, simply, choose a less expensive house.
Poor credit rating
If you are refused credit on the basis of a credit bureau report, you are entitled to a free copy of the report from the credit reporting agency itself. You can then challenge any errors and can also insist that the credit reporting agency include your side of any unresolved credit disputes that it reports. If your credit history is deficient in some way, you should start repaying debts in order to get current. Once you have improved your credit profile, you may be in a position to begin house hunting again. If you have applied for a loan using a non-traditional credit history that documents payments to landlords and utility companies, you may want to ask a non-profit housing agency or mortgage counselor to help you present the documentation in a more favorable light.
Perhaps your loan application was rejected because the appraisal of the property was too low compared to the agreed-upon price. You may be able to use the low appraisal to help you renegotiate the purchase price with the seller to an amount the lender would agree to finance. If the low appraisal reflects some structural problems or other needed repairs, see if you can get the owner to agree to fix the problem before the sale. Perhaps the lender will approve your loan request if the seller agrees to set aside funds in an escrow account to be used to make the needed repairs after the sale.
Seek outside help
Once you understand what caused your application denial, you can develop a realistic plan to be successful in the future. Investigate any state and local programs designed to encourage homeownership, including public and non-profit agencies. Is the house you want to buy in an urban renewal area? If so, there may be a government program that can help you finance your purchase.
Investigate alternative financing arrangements
As we discussed here, if you are a low- to moderate-income home buyer, you will want to look into one or more of the mortgage products designed to help home buyers of modest means obtain affordable housing. These alternative products may enable you to overcome some common barriers to homeownership, such as insufficient funds for a down payment or closing costs, having no established credit history, or having household expenses that are higher than the standards traditionally permitted in mortgage lending.
To recap, these mortgage programs include:
- Fannie Mae's and Freddie Mac's Community Lending Programs
- Subsidized second mortgage
- Lease-purchase mortgage loan
- Community home improvement mortgage loan
- Community land trust mortgage loan
- Housing finance agency programs
Look into non-conforming, or subprime, loans
If your credit has caused your loan to be denied, you may want to consider a non-conforming, or subprime loan. A subprime lender will charge you a higher interest rate and more points, to offset the additional risk you pose because of your credit history. Rates will vary a great deal between subprime lenders, so it is especially important that you compare lenders when deciding to take such a loan.
In deciding whether or not you should take a subprime loan, weigh the costs and benefits. Does it make sense to pay more now in terms of higher interest and points versus working to improve your credit and financial management habits. You can then apply for a "prime" loan later, at a lower rate and points. Many borrowers enter into subprime loans with the intention of refinancing to a cheaper loan later, once their credit standing improves. If you plan to do this, pay particular attention to whether such a loan has a pre-payment penalty, as this would add additional costs if and when you qualify for a less expensive loan.
Report suspected discrimination
The Equal Credit Opportunity Act and the Fair Housing Act prohibits discrimination against a loan applicant on the basis of race, religion, age, color, national origin, receipt of public housing funds, sex, or marital status. You have a right to your own credit, based on your own credit records and earnings. The lender must count all of your income, including reliable, documented child support and alimony payments (if you choose to disclose these) and part-time employment. If you suspect the lender has denied your credit application unfairly, you should report your grievance to the lender's regulatory agency or to the U.S. Department of Housing and Urban Development (HUD), the agency in charge of enforcing the Fair Housing Act.