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Turned Down for Loan. Now What?

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Posted On: 12/16/2015

QUESTION:

We recently applied for a mortgage and were turned down. How can we buy a home if lenders won’t give us a chance? What can we do to get financing?

ANSWER:

“Lenders” didn’t turn you down; just one lender said “no,” and that lender may simply be the wrong one for you.

Most loan applications, most of the time, sail through the system. According to the Ellie Mae Origination Insight Report for August, the closing rate for all loans was 66.3 percent, however borrower success varies substantially depending on whether you want a purchase money mortgage to buy a home (with a 70.8 percent success rate) or you’re refinancing (59.2 percent). The type of mortgage also counts. Ellie Mae says conventional borrowers do best (66.2 percent), followed by those who want VA financing (61.1 percent) and FHA mortgages (60.2 percent).

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The fact that your mortgage application has been declined should not deter you from getting a mortgage. The real question is why the lender declined it.

If a mortgage application is turned down you will receive what is commonly called a “denial letter” or “adverse action” notice. The Federal Reserve Bank of Minneapolis explains that “two federal laws – the Equal Credit Opportunity Act, as implemented by Regulation B, and the Fair Credit Reporting Act – reflect Congress’s determination that consumers and businesses applying for credit should receive notice of the reasons a creditor took adverse action on the application or on an existing credit account. Notice also required under the FCRA for adverse actions taken with respect to insurance transactions, employment decisions, and in certain other circumstances.”

You then have 60 days from when the notice was sent out to follow up. For instance, did the lender act on incorrect information? If yes, that’s something to discuss with the lender. Effectively, the 60-day period gives you a window to protest a lender decision.

However, and most likely, the lender’s information will be correct. In that case the problem could show up again if you apply for financing with another lender.

The most likely reasons for a loan rejection include issues such as poor credit, a big purchase during the loan application period which reduced your ability to qualify, a low appraisal, and insufficient income.

The last item needs a little bit of explaining. If the lender finds that your income is lower than expected, say $6,250 a month instead of $6,350 it means a greater proportion of your income will be needed for monthly debts. This can be a problem if your debt-to-income ratio exceeds 43 percent, the limit used by most loan programs.

As you review the lender’s letter consider correcting any erroneous information you find, getting a smaller loan, working out the problems outlined in the notice, re-submitting your application, or contacting another lender.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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