You’ve been denied a home loan. It’s OK to feel frustrated, but don’t throw up your hands in surrender. Lots of creditworthy would-be borrowers get turned down—that doesn’t mean they can never get a loan.
Almost half of all refinance applications get turned down and about 30 percent of purchasers’ share the same fate. After the 2008 economic collapse, lenders are understandably skittish about taking risks. However, there are things you can do to improve your loan prospects or find lenders suited for your needs.
Why was I turned down?
The first thing to do is simple: ask why. You have the right to receive a disclosure letter explaining your rejection. Unfortunately, the reasons provided are often too general to suggest a specific course of action.
Ask the actual person handling your application to explain your denial in as much detail as possible. Don’t be shy, that’s their job. You may find out you’re not even the problem.
Bad appraisals sink loans
If the property you’re borrowing against isn’t sufficiently valued for the loan you need, it can derail things. This is called “LTV”, or ‘loan-to-value’, and in this department, lenders rely on appraisals from management companies they work with.
Appraisals can vary substantially, and while you’re legally entitled to a rebuttal, they rarely result in higher appraised property value. By law, banks can’t accept a second appraisal, so it may be time to look for another lender.
Debt-to-income ratio is a big factor
Your debt-to-income ratio (DTI) is how much you owe relative to how much you earn. This formula factors heavily in deciding whether or not you’ll get your loan. That’s why it’s so important to know the lending requirements of any bank you’re working with.
Most lenders use Fannie Mae and Freddie Mac’s guidelines—a 45 percent debt-to-income ratio—but some are tougher. If your DTI exceeds your lender’s limits, consider a community bank that might be more flexible in dealing with situations like yours. They’re often more receptive to folks with higher DTI ratios, such as many small business owners.
Your credit could be the culprit
The classic problem: your credit scores weren’t good enough. This could be a fundamental obstacle or a temporary setback. Borrowers are judged on where they fall in a “range of risk”, so if your score’s on the margin, getting a loan can become a game of inches.
First, you need to know what your credit scores are. Second, you need to understand why your scores are what they are. You can find out by obtaining your free credit report through Quizzle. Your report can be a bigger key to getting into your dream home than even the key to the front door itself.
Make repairs and re-apply
Once you’ve reviewed your report, pay down outstanding debts that might be doing damage. Shaving a little debt may make your scores lean and mean enough to get that loan.
It takes 30 to 90 days for payments to show up on your credit report, but you can speed things up. Through “rapid rescoring”, lenders and mortgage brokers can generate new credit scores in a couple days. Not all lenders allow this, so ask if yours does.
Don’t give up!
Ultimately, you may still not be in the lending sweet spot. Don’t panic—this is a process that takes time. Even if your credit score needs serious work, you don’t have to give up on the life you want to live.
By paying down bills, balancing debt-to-income, building a solid payment history, and monitoring your credit reports and scores, you can prepare for another run at a loan. With a little perseverance, your dreams can still become your reality.