mortgage

Mortgage application denied? Don't despair

Highlights
  • Banks reject lots of mortgage applications from creditworthy borrowers.
  • The lender must explain why it turned the applicant down for a mortgage.
  • When the borrower knows the reason for denial, the issue might be fixable.

Your mortgage application was denied. These words sound harsh, but they don't always mean you can't get a mortgage.

Lenders reject about 1 in every 2 applications they receive to refinance a mortgage, according to the Mortgage Bankers Association. About 30 percent of purchasers who apply for a mortgage are turned down.

Despite the tight lending environment, borrowers shouldn't always take "no" for an answer. In some cases, they just need to apply with a different lender or take a few simple steps to improve their credit.

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"Lenders have different requirements," says Jason Auerbach, divisional manager for First Choice Loan Services in New York. "Not every borrower is appropriate for every lender, which doesn't mean they shouldn't get a mortgage."

Not all borrowers are successful when they reapply. To decide if it makes sense to reapply, borrowers must learn what went wrong, he says.

Why don't you qualify?

Once you're informed your mortgage application is denied, find out exactly why the lender turned you down, says Ed Conarchy, a mortgage banker at Cherry Creek Mortgage in Gurnee, Ill.

"By law, you have the right to receive a disclosure (denial) letter with the reason you were rejected," he says. "But those letters can be very general."

If you don't understand the reasons listed on the denial letter, ask the loan officer to explain it to you, Auerbach says.

"Ask the front person on your loan as many questions as possible," he says.

Appraisals

Sometimes the reason for the rejection is simple: The property's value isn't sufficient to back the amount of the loan. Lowball appraisals kill many purchases and refinances, but sometime it's just a matter of reapplying with a second lender, says Mathew Carson, a broker at First Capital Group Inc. in San Francisco.

"If you get declined due to LTV (loan-to-value), it's always worth looking into a new lender to see if you could get another appraisal," Carson says. "A lot of these appraisers are shooting in the dark. Depending on what management company the lender uses, the appraisal can change greatly."

In a perfect world, the appraised value on a house shouldn't vary much from one appraisal to another. But they do, Carson says. He cites a recent loan application he handled, where the mortgage was initially rejected because the appraisal was too low. Later, it was approved with a second lender. The appraiser hired by the first lender said the property was worth $1 million. A second appraiser, hired by a different lender, valued the property at $2.3 million and the borrower was able to refinance.

"I understand appraisals can differ, but there shouldn't be million-dollar deltas between these appraisals," Carson says.

Borrowers and lenders are not allowed to order second appraisals as they attempt to get a mortgage approval. Borrowers have the right to ask for an appraisal rebuttal, but most of the time the review does not result in a higher appraised value, which is why many borrowers choose to apply with a different lender if they think the appraisal is incorrect.

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