So you’ve been rejected for a Home Loan. Let me first tell you that I completely sympathize with you, it sucks. I applied for my first home loan in 2002 when my wife and I were first married. We looked at how much we made and wanted to jump on in time to get the first time home owner buyer assistance. This was a program that covered part of your down payment or closing cost. They laughed at us, and told us outright we did not have a chance to get into a home. Seven years later we finally got a preapproval for a home loan. Then, two weeks before closing it all fell through. I was devastated. But we didn’t give up and with the help of some crafty calculations we were approved by another lender by the time the closing came.
If you’ve been rejected from a home loan there are really two points in the buying process where you can be rejected; preapproval and underwriting. Preapproval is when you first start talking to a mortgage consultant. Remember, the people who get you into mortgages get paid when you get a loan. So they have nothing but motivation to help you get into a loan. When they tell you that you don’t’ have enough assets, listen to them. When they tell you that there isn’t enough lines of credit, listen to them. When they tell you not to apply for every credit card on the planet, listen to them. But, don’t’ just listen to them. Get a second opinion.
Each bank, lender, or mortgage broker has two sets of rules they follow. The first set is rules that government regulators set up. These rules will establish things that protect the economy from crashing (like the recent real-estate bubble that just popped). Then they have their own set of rules that establishes how much risk the bank is willing to take on you. Mortgage sales agents are familiar with the limits on what each bank is willing to take and what the underwriter is willing to do. But there are several banks, and several rules so explore your options. You might even find agents in the same lending group who are skilled enough to get you approved where another agent could not. Remember, the agent is not just trying to sell you a loan; they are also selling to an underwriter why you should get a home loan.
If it’s just not possible, here are some things you can do to get a preapproval letter:
Pay your bills on time for 6 months to a year (or always if you want a good score). This includes water, electric, gas, and phone. Utility companies can present a letter showing positive payment history that most lenders will consider.
Establish 1 or 2 lines of credit and don’t max them out. For instance, if you get a credit card with a limit of $300, don’t spend the full limit and pay it off. On your credit report it shows the balance at the time of payment but does not show how much you paid. So if your card is $300 every month and you pay it off, guess what? It looks like you are always maxed out on your cards.
Signature loans are ok, but they don’t offer the payment history that most lenders are looking for. One bad bit of advice given to me was to get a signature loan, and then reapply after a few months to make it look like I was making payments over a year. In truth, this made it look like I closed one account and opened another account. It did not help my credit rating.
Buy here pay here car lots typically don’t report your payments to your credit report. So if you buy a car from one of those “we rebuild your credit” car lots, you might be surprised that it did nothing for your credit at all.
Applying for new credit cards hurt your score. Closing a credit card hurts your score. While it’s important to have lines of credit, it hurts when you open and close them. Only open and close a card when needed.
Build up assets. These include life insurance policies that you can borrow against, 401k programs, savings accounts, CDs, and money market accounts. Lenders love to see that you are responsible enough to save money.
Do not overdraft your account. My home loan was denied because of a $3 overdraft in my checking account. Since I failed to account for it when the paperwork was sent to the underwriter the loan was denied outright citing that I was unable to manage my finances.
What happens if you are denied from an underwriter?
This really comes down to how close you are to closing and how willing your sellers are to waiting. Even if you don’t have time on your side, there are a couple of things to consider. Mortgage agents come in two types; those who work for banks, and those who sell to banks. Typically called mortgage brokers, the type that sells mortgages to a bank will get you approved and the loan pushed through but will resell the loan to a bigger bank. So if you get rejected by a bank like Wells Fargo or Bank of America, look for the second type of mortgage agent.
Pay down your credit cards. By me paying $2000 of my credit cards and getting letters from the card companies, I was able to raise my credit score 40 points in less than a month. But don’t just go paying any loan off. Remember, signature loans appear as closed account when you pay them off and this can negatively affect your score. Look for a mortgage agent with a “what if” credit simulator to see if they can calculate what would have the highest impact on your score.
Consider borrowing money from friends or family members. If they find that you lack in assets, you are allowed to borrow money from a friend or family member provided they sign a letter stating the money is a gift. Now, what defines a gift is loosely regulated by banks and brokers. For instance, with the $8000 home buyer tax credit given in 2008 through 2010, it was not uncommon to see individuals gift that money back to the individuals who helped them buy the home. Your mortgage broker should know the rules on this and will advise you accordingly.
If, like me, you denied for negative balance, you may consider waiting the time period of time in which the lender pulls bank statements. For me, it was 60 days, but since it had been positive 30 days I would only have to wait another 30 days to pull the bank statements again.
Other things like finding a home with a lower value, increase your down payment, and asking for a higher interest rate will have little impact on an underwriters decision. While it never hurts to ask it will almost never result in approval.
The overall point is never give up no matter how far in the process you are. It took me 7 years from the first time I talked to a mortgage agent to the date I actually got a home to get approved. It’s stressful. It became a lifestyle of monitoring my credit report and checking back with agents to see if I could be approved. I got advice from real-estate agents, bankers, friends, and family. The best advice anyone will ever give is not to give up. If you work toward it, one day you will be approved.