What to Do When You Are Turned Down for a Mortgage!
Are you interested in buying real estate but had your application for a home loan rejected, you have options. Plenty of them. Of course you can ask the lending institution why they put the kibosh on your application but they wont likely tell you the complete story because they are afraid sue them. There are many factors that the bank considers when deciding whether or not to grant you the loan. Some of these reasons may have nothing to do with you at all. The bank has its own guidelines and they’ll never share them with you as I said. But regardless, one of the most important considerations is your credit score. And as you’ll see, you can do plenty about that.
But let’s get back to business. You will received your loan rejections letter, now what do you do? First, decide if you want to try to go forward with the purchase anyway. If so, this will require you to find financing alternatives. One good option is getting the seller to carry the mortgage. Even if you have bad credit you still might be able to achieve this. That is because interest rates are so low right now, sellers might be very interested in getting more than 1% on their money. Of course this will probably work best if you provide a significant down payment on the purchase. But if the seller is very motivated, he or she might be willing to provide financing without a substantial down payment. Regardless of your decision to go ahead with the purchase or not, you should do everything possible to make yourself a more attractive borrower.
1. Check your credit score and report.
Are there any errors on your report? If so, you can correct credit report errors yourself in many cases. But the only way you know if there are errors is if you first get a hold of your report. Fortunately, you can do that easily. There are even ways to get your free credit score without using a credit card.
2. Start building a high credit score
You will need to improve your credit score. Make sure you carry a credit card balance every month. Pay off your consumer debt every month on time. If you need to consolidate your debt, consider doing so by using a peer-to-peer lending company like Lending Club. This is a great way to pay off high cost credit card debt and get a lower monthly payment and lower interest rate.
3. Fall in love with your job
One fear that banks have is when a borrower changes jobs often. It demonstrates instability and higher risk. Your best bet is to stick with your job for at least 3 years in order to garner maximum brownie points with lenders and keeping a job is also a great way to stay out of debt too. Nice side benefit. The younger you are, the more forgiving the banks are when it comes to job stability. Take this to mean that as you get older, lenders will look for more than 3 years. Conclusion? take jobs you think you'll keep. This goes for folks without a college diploma. You can still find great jobs without a college degree. If someone in your house is a deadbeat, your address might be flagged and that might be at least partially responsible for your loan rejection. If someone who lives at your home t make a credit card payment or payment on another loan, probably been reported to one of the three credit bureaus and going to get twisted for it. Either ask the person who is casting a giant shadow on your loan app to move out or explain to the bank manager that this person is in no way financially associated with you assuming true.
5. Round Peg – Square Hole
Each bank has its own lending policies as I said above. That means they decide what kind of loans they want to make to which kinds of people. For reasons never explain, you may not fit their profile. So if you get a loan rejected and understand why, go speak to the manager. Ask her if the decision would be positive if you are able to pony up more security. You could get someone to guarantee your loan or be a co-borrower. You could also offer collateral.
We all know it's tougher to get a home loan these days compared with just a few years ago. Banks tightened their credit standards dramatically during the credit crunch, and lenders now accept only 55% of all mortgage applications, according to the latest annual statistics from the Mortgage Bankers Association.
Overall lending by U.S. banks plunged by 7.4% in 2009, the sharpest decline since 1942, based on FDIC data. And so far in 2010, banks have yet to ease lending standards.
So if you're thinking about buying a house or refinancing your current home, it's time to arm yourself with information that will ensure you get a "Yes" from a lender.
Here are seven reasons people get turned down for a mortgage – along with some advice on how to overcome these obstacles.
Overall lending by U.S. banks plunged by 7.4% in 2009, the sharpest decline since 1942, based on FDIC data. And so far in 2010, banks have yet to ease lending standards.
So if you're thinking about buying a house or refinancing your current home, it's time to arm yourself with information that will ensure you get a "Yes" from a lender.
Here are seven reasons people get turned down for a mortgage – along with some advice on how to overcome these obstacles.
1. Can't properly document your income
This may come as a shocker to many people – especially those who have worked so hard to get that super-high FICO score or to save a ton of cash. But having good credit isn't the be-all and end-all in the mortgage lending business. Neither does having a pile of greenbacks make you a shoe-in for a mortgage.
"You can have an 800 FICO score and $1 million sitting in a bank account at some institution, but if you can't prove your income, and back it up with your tax records, we simply can not do that loan," says Thasunda Brown Duckett, senior vice president and Northeast region manager for Chase Mortgage, a division of JP Morgan Chase.
Other income-related issues that can trip up a mortgage application include: frequent job-hopping, gaps in employment, not having two years' consecutive employment in the same industry, or recently going from a salaried position to commission-based work, which makes it difficult to document your track record and true earnings history.
"Credit still matters, of course, and you do need to have cash reserves," Duckett said. "But in this environment, we're getting back to basics and looking at all the factors – such as how much you're borrowing, the loan-to-value ratio on the loan, how leveraged you are, and whether or not your tax returns show that you can weather the storm if taxes go up or things go wrong with your home. So it's not only about your credit score or reserves."
2. Lack strong "compensating factors"
If your application has some problem issue or you're on the borderline of qualifying, perhaps because your debt-to-income ratio is a bit high, "one way to strengthen your application is with compensating factors," says Chris Jordan, a licensed mortgage banker with First Home Mortgage in Silver Spring, MD. A "compensating factor" is mortgage industry lingo for having some positive aspect in your mortgage application to offset other negatives.
Jordan said examples of compensating factors may include:
- Big down payment (more than 20%)
- Lower than normal loan-to-value ratio (less than 80%)
- Lots of cash reserves (12 months or more)
- High credit score (above 740)
For borrowers without a pristine application, a lack of strong compensating factors could mean your application is dead in the water.
3. Picked the wrong type of property
There are some kinds of properties many lenders remain skittish about financing. Among them: second homes and investment properties. This doesn't mean funding isn't available for these buildings; only that they carry more stringent terms, like bigger down payments and more cash reserve requirements.
Condos are another tricky area, especially those in new developments. As a buyer, you may think you're picking up a terrific bargain by getting in early on a condo that's currently under construction or in the early selling phase.
But be forewarned: most banks won't lend money on condos unless 70% or more of the units have been sold. What's more, lenders won't issue mortgages on condos in complexes that aren't on the FHA's approved list of condos.
"We've had customers who have put down big down payments of $30,000 or more on condos, and then they can't get approved because the project isn't approved," says Duckett. So she recommends that before you fork over a down payment, ask your lender about whether the condo you're considering is on its approved condo list.
4. Sandbagged by a know-nothing appraiser
During the heyday of the 2004 to 2007 real estate boom, home values soared. Critics said shoddy, overly-optimistic appraisals were partly to blame. So as of May 1, 2009, a new Home Valuation Code of Conduct went into effect mandating, among other things, that home appraisers be selected at random.
Industry experts say this new requirement is causing its own headaches for buyers and sellers – even very wealthy purchasers.
Paul Stillwagon is a Weichert real estate agent who runs New Jersey Estates Real Estate Group. He sells high-end homes, often in the millions of dollars. And while most of his buyers come in with all-cash offers, some do require mortgages. Like most real estate agents, Stillwagon holds his breath when waiting for those appraisals.
"The banks are real tough right now. One problem getting loans done is that they use poor appraisers and they don't comp out the houses" Stillwagon says. "A lot of these appraisers don't know comps in the area," so an appraisal might come in low.
Mortgage experts said homeowners seeking equity lines are also feeling the pain. In many cases for equity loans, all that's done is a "drive-by" appraisal, a passing inspection of the outside of someone's home. In other instances, even a drive-by appraisal isn't done. Instead, an appraisal is generated from someone's desk, based on information available online about local property values and sales.
Such data can often be misleading because it includes short sales, foreclosures and homes that may not be truly comparable to the home in question.
The solution here, observers said, is to make sure a physical appraisal of the property gets done – preferably by an experienced, local professional.
5. Inexperienced loan officer or mortgage broker
"I'm convinced that the number one reason people get declined for mortgages is that they picked the wrong loan officer," says Ray Kuplaste, a mortgage broker and sales manager at United Capital Lenders in Southampton, PA.
An experienced pro should be able to tell you how to quickly improve your debt-to-income ratio or what kind of loan makes best sense for your situation.
Equally important: That person should be a whiz at navigating the electronic underwriting tools – such as Desktop Underwriter and Loan Prospector – that are used to spit out mortgage approvals. These automated underwriting services contain all the ever-changing guidelines and requirements imposed by Fannie Maeand Freddie Mac, the two government-sponsored entities to whom banks typically sell loans.
Unfortunately, according to Kuplaste, too many loan officers and brokers lack these skills. "I'll take 100 loans that Wells Fargo or Bank of America denied, I'll restructure them and then go back to the same banks, and I'll get 80% of them closed," Kuplaste says. "So it's often all about how a loan is structured and packaged."
As of 2010, mortgage brokers must now get licensed. Industry sources say only a small fraction of brokers have their licenses. Check out the experience and educational background of any mortgage professional, and see whether he or she is licensed.
6. Picked the wrong bank – or just one bank
"Another reason people get denied is that they just go to their current bank, which only has one set of loan programs," Kuplaste says. "I have 60 or 70 banks on board, and I know everybody's (lending) guidelines. So if one bank won't do a certain loan, chances are another one will."
Kuplaste notes that some mortgage denials really boil down to a lack of information, or an underwriter being unclear about something on an application. "So if there's anything that's iffy in a file, I'll add an explanation letter in there," Kuplaste says.
Henry Savage, owner of PMC Mortgage in Alexandria, VA, agrees that mortgage pros must now "document everything" to get loans to pass muster with underwriters.
Savage laments what he calls a "complete lack of reason and common sense" on the part of many lenders. "All they care about now is documenting files so that they can meet Fannie and Freddie's guidelines and sell off those loans," Savage says. "Even the most perfect borrowers have to jump through all kinds of crazy hoops to get a loan."
7. Bushwhacked by new rules
Let's say you find a condo project that's approved, and everything else is stellar on your loan application, that doesn't mean your mortgage is assured. "There are a lot of rules that govern conventional and government-backed loans, especially for condos," says Jordan.
Because condos have historically had higher default rates, one new FHA rule is that the delinquencies on condo dues have to be less than 30%. Often, this information isn't known until after there's a ratified contract, and well into the mortgage process.
For these reasons and more, "purchasing or selling a condo has become very, very difficult and complicated," Jordan says.
See Lynnette discuss this article on ABC News!
Don't be surprised if your friendly lender, the one who invites you to sit down and apply for a mortgage, then ushers you politely out the door empty-handed after you've chatted a bit.
The sudden chill isn't personal. The Mortgage Bankers Association, or MBA, in Washington, D.C., estimates that about half of all mortgage applicants are now being turned down."Our latest survey covered the first half of 2008," says MBA spokeswoman Carolyn Kemp. Then, the acceptance rate for purchase applications was 55 percent, and 65 percent for refinance requests. Since then, further tightening of credit standards means at least half of mortgage-seeking consumers can't squeeze through to acceptance, Kemp says.
Instead of yielding to shame, anger or any of the usual emotions associated with rejection, today's consumers who are intent on buying or refinancing should adopt a pragmatic stance since clear-eyed determination may eventually land them a loan.
Here's how:
Landing the loan
- Get a read on reason.
- Find a fix.
- Seek out other opinions.
- Give it another try.
Get a read on the reason
If you've submitted a formal application, federal law dictates that you're entitled to a formal rejection.Expect an "adverse action" notice, spelling out the reasons for turning you down, which these days is likely to state that the loan amount you're seeking is too large compared to the current appraised value of your home, says Joe Thiesen, president of the Wisconsin Mortgage Professionals Association and branch manager of Fairway Independent Mortgage Corp. in Madison, Wis.If it's not your home's value that's the issue, it may be your personal credentials, such as your credit worthiness, work history, or debt load.
When credit is the issue, an adverse-action notice is required, naming the credit reporting agency that provided the data on which the lender based its decision, according to Federal Trade Commission rules. You're also entitled to a free credit report; see the FTC Web site for more information.
Given the odds of acceptance, a lender may not require you to pay a few hundred dollars to submit a formal application, which includes the cost of a professional appraisal on the property. Instead, he may pull a credit score, and tell you what you're likely eligible for, says Marc Savitt, president of the National Association of Mortgage Brokers.
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