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.
“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.
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.
Denied because of credit issues
Credit problems often stand in the way of a mortgage loan approval. While some cases require substantial credit improvements, others can be resolved fairly quickly.
If your credit score is slightly lower than what the lender requires, you might be able to bump up that score and reapply, Carson says.
“I just helped a couple who needed to improve their score,” he says. “And all they had to do was pay off some credit cards. That bumped up their scores by 30 points.”
It can take 30 to 90 days for payments or other credit activities to reflect on a borrower’s credit history. But lenders and mortgage brokers can use an expedited reporting system, known as rapid rescore, to get a new score within a couple of days after the changes are made. Not all lenders are willing to obtain rapid rescores.
The expedited scoring system may be a quick solution for borrowers who are turned down because of high debt-to-income ratios, which is a formula used to compare monthly payment obligations versus income.
“Sometimes you just need to pay off some debt,” says Juan Rodriguez, a residential banker with Baytree National Bank & Trust in Chicago.
If your DTI is slightly above a lender’s limit, it might be worth trying a lender who allows for higher debt-to-income ratios, Auerbach says. Most lenders follow Fannie Mae and Freddie Mac guidelines, but some have additional layers and more stringent requirements in place.
“Fannie Mae sets a 45 percent debt-to-income ratio (limit), but maybe that particular bank has a 38 percent” limit, he says. “That’s why it’s important to know your lender requirements. Know why you were denied.”
Smaller lender could help
When trying a different lender, keep in mind community banks tend to have more flexible underwriting standards, says Rodriguez.
“If your situation requires an exception, for example say you are self-employed, a community bank offers some flexibility for self-employed individuals,” he says.
Sometimes you just have to wait
But if you are deeply indebted or have too many credit problems, regardless of how many lenders you try, you might not succeed at obtaining a mortgage approval.
In that case, “get your finances in order first” Conarchy says. “That’s especially the case if you are buying a home.”