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.
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.
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.
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.
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.
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.
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.
Nothing
can be more damaging to your loan request than a history
of poor debt repayment practices. If the credit report shows
frequent late charges, past due accounts, judgments or bankruptcy,
chances for approval of the loan are slim. Lenders may stretch
their guidelines on debt ratios or income requirements,
but have little tolerance for a bad credit record. Even
low loan-to-value ratios and debt ratios cannot offset an
unsatisfactory credit history.
If
your loan is turned down because of a poor credit report,
you may request a free copy of the report from the credit
report company, which will be identified in a notice from
the lender. Examine the credit report carefully to see if
it is up to date and accurate. The credit bureau must correct
any errors in the report. If there are unsettled disputes
over certain accounts, it must also include your side of
the argument in the report. Even if the name on the report
seems to be you, make sure all of the accounts and references
apply to you. Many people have the same name and improper
recording of data occurs.
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.
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.
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.
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