You’re crushed. So much for buying a home. Or do would-be homeowners have some recourse after they’ve been denied home loans?
Turns out there are ways to bounce back from a rejected application. Here are a few tips to help you find financing, even if you were initially disapproved.
Find out why your application was rejected. Rejection can happen to an application for a first mortgage or even a home equity loan. To understand your options for getting an approval, you need to understand what caused the rejection in the first place. If you query the lender about the reason for the disapproval within 60 days of receiving a rejection, the lender has a legal obligation to give you a specific explanation beyond not meeting the minimum requirements. Maybe your credit rating was poor. Maybe you had too much debt. Maybe your employment history was spotty—you are entitled to this information.
Once you know why you received the rejection, you can take steps to remedy the cause(s) and appear more attractive to mortgage lenders. Let’s say the lender thought your debt-to-income ratio was too high and you didn’t have a good enough credit rating. In this case, you can actually ask the lender for an exception—essentially a second opinion from someone else in the company. Submit a detailed letter that explains the reason for any current debt and your current credit score. Asking for an exception may only work, however, if the lender failed to notify you in writing within 30 days of the disapproval or if a major catastrophe such as an unforeseen major medical expense, divorce, or natural disaster damaged your otherwise stable financial situation.
If your income was the reason for your rejection, consider getting a co-signer or someone to go in on the loan with you. Should a family member be willing to act as the co-signer and assume liability for the loan in the event that you default, you can use their disposable income and higher credit rating to present a more favorable picture to a lender. Or if you can convince someone to put his or her name on the mortgage application along with yours—meaning that he or she would have to contribute to mortgage payments—you may also be able to raise your profile. Just remember that this is risky for the co-signer/co-borrower and shouldn’t be used as an option if you’re uncertain about the ability of anyone involved with the mortgage to make payments in the future.
Check for discrepancies/inaccuracies. Following a rejection, you can request a copy of the home appraisal from the lender and make sure that it is accurate. Likewise, if your application is rejected due to credit issues, obtain a copy of your credit report and make sure there are no discrepancies or inaccuracies that may have caused your number to be calculated at a lower rate than it should have been.
Although less likely, some disapprovals are due to race, gender, handicap, marital status, and other illegal biases on the part of the lender. If you suspect that you may have been discriminated against, the first course of action is often to bring the issue up with the highest-ranking person member of the lending agency. If that proves ineffective, you may need to contact the lender’s federal regulatory agency, local private fair housing agency, and/or the U.S. Department of Housing and Urban Development about a possible Equal Credit Opportunity Act or Federal Fair Housing Act violation.
File an application with a different lender. Like asking for an exception, using a different lender can result in a “yes” whereas previously you encountered a firm “no.” At this juncture, asking another lender is valuable because it can help you understand if the reason for the initial denial was truly because of something to do with you or if it had more to do with the lender. If multiple lenders reject you for the same reason, it’s time to reconsider whether you’re able to buy a home at this point. Find a less expensive property or wait. If you’ve exhausted the above options, you may have to settle for a lower-priced property for which you can secure a sufficient mortgage or wait to buy your ideal home after you improve your credit rating and whittle down your debt. This is obviously the last and least appealing option, but it may also be the safest; the headache of a mortgage that you can’t afford is much greater than the one caused by renting for a few more years until you’re financially ready for the home of your dreams.
1. Will I save money? Saving money is the fundamental reason behind refinancing. The basic rule of thumb is that if interest rates are between 1/2% and 5/8% lower than your current interest rate, it may be time to refinance.
There are numerous times when refinancing makes sense. For example, if you took out a first and second mortgage simultaneously to avoid the costly private mortgage insurance associated with a high LTV ratio, refinancing both mortgages into one standalone mortgage with an LTV ratio of less than 80% can save you money and secure a better rate.
Or, for example, if you’ve got major upcoming expenses such as college tuition, home repairs, or a new car, you may need the funds provided by a cash-out refinance. Cash-out refinances work like home equity loans, drawing on the equity that the home has accrued to pay off the balance of the mortgage as well as give you additional funds to use at your discretion.
However, bear in mind that not everyone qualifies for the lowest available rate. A lender looks at a number of factors, including credit scores and existing loan-to-value (LTV) ratios, so you may not be able to lock in a better interest rate automatically.
2. How long do I plan to keep my current home? While there’s no doubt that refinancing can save you money, it also comes with a caveat. If you’re planning to move within a few years, the closing costs associated with refinancing might not be realized through the amount of money you’ll save while you’re still living in your current home. The longer you plan to maintain your current residence, the better.
3. Can I break even? Determine your break-even point—exactly how long it will take you to recoup the costs of refinancing and realize the savings. This can be accomplished in minutes by using a refinancing calculator. You can find links to free calculators at Homemortgage-hq.com, your complete source for first, second, refinanced, and reverse mortgage information.