WHAT TO DO WHEN YOUR MORTGAGE ISN'T APPROVED
“We’re sorry, Mr. & Mrs. Borrower. Your mortgage application was denied.” These are stinging words but they don't always mean you can't get a mortgage.
Lenders reject nearly one out of two applications for a refinance mortgage, according to the Mortgage Bankers Association (MBA). Close to 30% of purchasers who apply for a mortgage are also turned down.
In spite of the tight lending environment, borrowers shouldn't always take "no" for an answer. Oftentimes, they simply need to apply with a different lender, or perhaps take a few simple steps to improve their credit and apply again.
Each lender has different requirements, which means that not every borrower fits within the guidelines of that lender. It doesn’t, however, mean that they shouldn’t be able to get a loan. The caveat is: not all borrowers reapply with better success. Your best bet is to see if it makes good financial sense to reapply. The only way to do that is to find out what “kicked out” the loan during the underwriting process.
Don’t get angry. Get informed. Once you are notified that your mortgage application is denied, find out exactly why the lender turned you down. You have the right to receive a “denial letter” clearly explaining why you were turned down. If it’s still not clear, ask your Loan Officer to walk you through with more details.
It’s not about you. No, really. The reason for rejection might not have anything to do with you at all. It could be that the property value of the home you want to finance (or re-finance) isn't sufficient to guarantee the amount of the loan. Low-ball appraisals can stop purchases or refinances in their tracks. However, an appraisal is an opinion based on available information. If you are declined due to a low loan-to-value ratio (LTV), you can reply with a rebuttal letter. That said, since borrowers and lenders are not allowed to order second appraisals, it may be best to go with a different lender if you truly feel the appraisal is way off the mark.
Your number isn’t up. Insufficient credit scores and credit report problems often stymie a mortgage loan approval. The good news is that in many cases, credit issues can be resolved fairly quickly. With what is called a “rapid rescore”, you may be able to bump up your score and re-apply. Rapid rescore is an expedited reporting system available to lenders and mortgage brokers to circumvent the 30-90 day wait period for positive credit activities to reflect on a borrower’s history. Not all lenders will do this, so ask up front if they will in the case of a credit mishap.
You bought a zoo? Oftentimes, you will need to pay down some of the debt you have on your credit report so that you can lower your debt-to-income ratio (DTI), which is a formula used to compare monthly payment obligations versus income. If your DTI is slightly above a lender's underwriting limits, it could be worth trying a lender who allows for higher debt-to-income ratios. Most lenders follow Fannie Mae and Freddie Mac guidelines (45% DTI limits), but some have additional layers and more stringent requirements in place. A rapid rescore may be a quick solution for borrowers who are turned down in this situation.
Seek neighborly assistance. When trying a different lender, don’t forget your community banks, which tend to have more flexible underwriting standards. They can be more favorable especially if you are already a banking customer. Community lenders are often beneficial for borrowers with special circumstances, such as those who are self-employed.
Good things come to those who wait. Timing is everything, and if you are deeply in debt or you have too many credit challenges, you may very well not succeed at getting a mortgage approval regardless of how many lenders with whom you apply. If this is your case, spend the time to really dig into repairing your credit and paying off those debts. It may feel disappointing – even a bit painful – but in the long run it will pay off when you finally have that mortgage approval in hand.