Handling Loan Rejection
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.The following information will help you
understand the most common reasons for loan denials and corrective
measures you can take. It also describes some alternatives that exist,
especially for low and moderate income home buyers.
If you find you
are having a rough time trying to qualify, 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, there are usually steps you can take to
see your dream come true.
One of the
factors considered by the lender is the ratio of 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 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 there's a problem with the appraiser. Maybe he is not familiar
with property values 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 provided 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, however 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 payment), 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 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.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 beyond industry norms and can cause denial of the
loan. If you feel confident 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. Be sure 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.
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. 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, 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.
Can the seller
assist with financing? Sellers may 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 obtaining loan approval. Go over
what action should be taken to make yourself more attractive to lenders.
Once these things are addressed and corrected, you should be in a much
better position to borrow.
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 of 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 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 change after 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.
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 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.
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 find them in
the phone book under government listings.
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 . 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.
The fact that a
lender has rejected your loan application does not mean that you are
denied home ownership forever. As 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.
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