One reason it is recommended to get pre-approved for a mortgage early in the home buying process is to reduce barriers once you find a property. However, the pre-approval process is not a guarantee. While it is not common, there are occasions when a client has their home selected and is ready and willing to sign, only to have the mortgage denied. The good news is that there may be options available; getting turned down for a mortgage isn’t necessarily the end for every buyer.
The first thing to understand about the mortgage process is that a pre-approval is completed by a mortgage professional, not an underwriter. This means that a buyer’s loan is likely to be approved, based on the information the mortgage professional has been provided. An underwriter may have more specific requirements that a buyer may not meet.
According to a recent post in the Wall Street Journal, the primary reason reported for denials, for both purchases and refinances, was applicant credit history. Other major reasons may include a high debt-to-income ratio and borrowers with insufficient funds in reserve. These issues may cause problems for some lenders while other lenders may allow some blemishes. If you are denied, you may not be completely out of luck. For many buyers, there are options available.
Step 1: Find out why your mortgage was rejected. Lenders are required by law to issue a written “adverse action notice” within 30 days when rejecting a mortgage. This notice must include the reason for the rejection. Once you know why the mortgage was rejected, you can work to correct any errors on your credit or work with your mortgage professional to see what other options are available.
Step 2: In certain cases, the reason for rejection can be argued to your favor. If that is your situation, you can request a second opinion, just like you might ask a second opinion for a medical diagnosis. Some lenders have a second tier of review that will allow you to present your case – including discussing any issues that are currently marring your credit history. Some buyers have been successful in implementing this step to receive approval.
Step 3: If you are still without a mortgage after the second opinion, or if your lender does not allow it, the next option is to shop around. The underwriter’s job is to assess risk and different lenders have different assessment criteria. One lender may reject your application for a reason that another lender will allow. These three steps are not a failsafe, but they can assist some buyers.
No matter why you were turned down for a mortgage, if there are blemishes on your credit that you know about now, it’s best to take care of these sooner rather than later. And, if you have questions about the mortgage process or about your specific mortgage application, it’s best to discuss them with a mortgage professional who can present options that match your situation.
* some photos from freedigitalphotos.net | Stuart MilesNBC Segment on Mortgage Interest Rates
NBC Nightly News just aired a segment on mortgage interest rates and a renewed refi craze. 30 year rates are down from 4.5% this time last year to 3.81%. The experts crystal ball is that rate will remain low but now is the time to act if you are thinking about a refi. Does a refi make sense to you with these interest rates? Talk to a lender and see what your break-even point is. Thinking about buying a home? I used this mortgage calculator to run these comparisons:
A $300,000 house with 10% down at 4.0% for 30 years has a monthly principle & interest payment of $1289.
A $300,000 house with 10% down at 4.5% for 30 years has a monthly principle & interest payment of $1368
A $300,000 house with 10% down at 5.0% for 30 years has a monthly principle & interest payment of $1449.
A $325,000 house with 10% down at 4.0% for 30 years has a monthly principle & interest payment of $1396.
A $325,000 house with 10% down at 4.5% for 30 years has a monthly principle & interest payment of $1482
A point increase has a bigger impact on the payment than a $25,000 price increase.
Here’s the full segment: