Turned down for a mortgage -- now what?

 

For many, being turned down for a mortgage is embarrassing and upsetting. Maybe even a slap in the face. But it shouldn't be -- often, it's just a mismatch between a loan applicant and a program or lender, and it can be fixed.

Don't Beat Yourself Up

Imagine you're playing games at a carnival. If you throw a dart and miss the bull's-eye, do you slink away and never return? Or do you adjust your throw and try again? If you're like most people, you shrug off a bad throw and make another attempt. That's exactly what you should do if your mortgage application is declined -- learn from your "miss" and adjust.

Ask Why

Mortgage lenders are required by law to issue an "adverse action" letter within 30 days when they decline a loan application. This letter must either state the principal reason(s) for the action or provide contact information so you can request it anytime within the next 60 days. Your next course of action depends on the reason(s) provided by the lender. Common reasons include a too-low credit score, short job history, too much debt, insufficient income, derogatory credit, or income instability.

Try Another Lender

If your lender turns you down when you believe that you meet the minimum loan program guidelines, you may be the victim of a "lender overlay.” That’s because while agencies like the FHA or government-sponsored enterprises like Fannie Mae and Freddie Mac establish minimum thresholds for their loans, individual lenders are allowed to impose more demanding criteria.

But that’s no biggie -- just contact other companies, ask them about their requirements, and apply if you think you can comply with their guidelines.

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What about the effect of multiple applications on your credit score? No worries – according to MyFICO.com, “FICO Scores ignore inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, FICO Scores look on your credit report for rate-shopping inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry.”

Get Help

One of the characteristics of a good loan professional is willingness to help and educate the client. You should be able to ask your mortgage banker or broker these questions and get solid answers:

 - How much does my income / credit score / down payment / assets / whatever have to change before I can be approved?

- Is there another program that could work for me?

- Can we try again with a smaller loan amount / larger down payment / lower interest rate / less debt / more assets / whatever?

Fix Credit Reporting Errors

If the issue is a credit score that "just missed," go through your report with your loan officer and make sure it's accurate. If an error causes your score to suffer, your lender may be able to help you fix it by using a "rapid rescorer." These companies work only through lenders, and they can clear mistakes (you must submit proof of the error) and quickly re-score your credit report. Note that this service has a nominal cost, there is no guarantee that your score will increase, and only entries proven to be inaccurate can be altered.

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Play with Numbers

Most lenders underwrite mortgage applications with automated underwriting systems (AUS). Not only can these systems provide preliminary underwriting decisions very quickly; they allow loan officers to “test drive” hypothetical situations. For instance, if Fannie Mae's Desktop Underwriter (DU) declines your application, your loan officer could resubmit it based on another scenario -- for example, with a higher down payment. If you get a preliminary approval under that scenario, you know what you have to do.

Get More Help!

If your credit, income, debt or other issues can't be resolved quickly, consider professional assistance. Reputable credit counseling services can help you budget effectively, and may be able to reduce the payments or interest rates of your consumer accounts. Stick with your plan, and you'll eventually pass muster with a mortgage lender.

Gina Pogol is a licensed mortgage lender with over a decade of mortgage lending experience. Her background includes public accounting, business credit  consulting and public accounting. She has been certified to underwrite Fannie Mae loans and specializes in writing about business and finance issues. Gina earned her BS in Financial Management from the University of Nevada.