You’re on the fast break to a dream home: Offer accepted, mortgage applied for, home inspection ordered. You`re cruising toward closing.
And then . . . rejection. Like Scottie Pippen swatting a weak jumper intothe third row, the mortgage banker turns down your application for a loan. Ouch. Faced.
Not really, even though it may feel that way at first. That’s because a mortgage rejection, like a Pippen facial, doesn’t mean the game is over. It just means you have to try a different strategy.
“Every case is different, but nobody should ever take it personally,” says Helen Dress, a real estate agent for Coldwell Banker’s downtown Chicago office.
“The good news is there are a lot of different ways to work through it–as long as you can be patient and allow for extra time,” she says. “If you want to close by the end of the month, however, thatcould be a problem.”
The first step in the process is to find out why you’ve been denied and what you can do to correct the problem. Lenders typically reject mortgage applications for one or more of a handful of reasons. By figuring out which reason has led to your rejection, you can begin coming up with solutions that will get you back into the homeownership game.
Rejection reason No. 1: Insufficient closing funds. It takes more than the down payment to close on a loan. There are all sorts of fees charged by the lender, local taxing authorities, title insurance companies and attorneys. The lender may determine you do not have adequate cash for the down payment and costs related to closing. That may be because you don’t have the money, or because you’re counting on a gift the bankers may not know about to help with closing funds.
Solution: According to Dress, there are some opportunities to cut down on closing costs, but they are not cure-alls.
“First of all, if you’re using an attorney, shop around for fees. Otherwise, one of the biggest costs is the points,” she says, referring to the upfront fee that lenders often charge (one point equals 1 percent of the loan amount). “Taxes, deeds, other paperwork you can’t avoid, but a buyer in a bind might look at taking a higher rate to cut a point or two.”
For instance, borrowers often will pay one, two or three points to the lender to get a loan at a lower interest rate. But you have to come up with those points–$1,000 to $3,000 on a $100,000 loan, for example–at closing. You may not have enough funds to cover that. A solution may be to go for a no-points mortgage at a higher rate. Your monthly mortgage payment will be larger, but the amount of cash you need at closing will be less–perhaps substantially less.
Also, if you receive money as a gift, obtain a letter from the person who gave it to you, indicating the amount and the fact that it is a gift. Additionally, if you don’t have the cash, the seller may be willing to pay some of the closing costs, but Dress says this is a lot less likely than it used to be.
“Back in the ’80s, when rates were at 20 percent, sellers would do just about anything, including covering closing. Today I just don’t see it unless the home has been on the market a long time and the seller wants it done,” she says. Otherwise, start saving.
Rejection reason No. 2: Inadequate income. Lenders are bean counters who crunch numbers and compute ratios to see if you fit into guidelines for a loan. Rightfully so. They want to see the loan repaid. Typically, here’s how they’d like your “beans” to line up: The proposed mortgage should be no more than about 28 percent of your monthly gross (before taxes) income. Your total monthly payments (including mortgage, credit cards, car payment, etc.) should not be more than 36 percent of the monthly gross income. So, if your gross monthly income is $3,000, the lender will allow your housing payment to total no more than $840 a month, and your total outlay for housing and other credit debt to total no more than $1,080 a month.
Solution: Try an ARM. “An adjustable-rate mortgage would qualify the buyer for more money, as the payment would be lower,” says John Munson, president of Anchor Mortgage Corp. in Chicago. According to Mortgage Market Information Services, rates on a 30-year fixed-rate mortgage in late July were about 8.5 percent with no points, while the rate on a loan whose rate adjusts every year is 6.375 percent the first year.
Munson adds that a prospective homeowner need not live and die by the 28/36 ratio. “There are a number of programs which allow higher ratios of housing expense to income,” he says. “The 28/36 ratio is like a size 8 shoe that a lot of institutions try to make fit for everybody. If it doesn’t fit it doesn’t fit. There are other options.”
One of those options, Munson notes, is securing a “portfolio loan”–a loan that is exclusively held by a mortgage company, bank or other financial institution. These loans are not sold to other companies and, as a result, the lending institution can be more lenient when it comes to the parameters for loan approval.
Also, don’t overlook changes in your income during the loan-application and home-buying process. If there has been a positive change in your financial status since your application was filed–a bonus, salary increase or, perhaps, a spouse returning to work–be sure to update the lender, who will likely require a letter of verification.
Rejection reason No. 3: Appraisal value. The mortgage amount is limited to the lower of the sale price or the appraised value. If the price you’ve agreed to is substantially higher than the appraised value, you will likely face rejection on the loan. For example: The sales price of the home you want is $200,000, you’ve put down $20,000 and have applied for a mortgage equal to 90 percent of the home’s value, or $180,000. If the home then appraises for only $195,000, then the lender will approve a mortgage for no more than 90 percent of $195,000, or $175,500. Someone has got to come up with an extra $4,500.
Solution: If comparable properties, or “comps,” in the neighborhood sold for less than the property you’re looking to purchase, you can try to renegotiate with the seller to bring the price more in line with the neighborhood. The lender may be willing to approve a loan of a lower amount. Otherwise, you may be able to get a loan for a lower amount, but you will have to bridge the gap with cash funds to be paid at closing.
“In this case you really need to show the seller (that) no one–you or anybody else–will be able to buy the house given their terms,” Munson says. He also recommends hiring an independent fee appraiser.
“A bank’s staff appraiser is likely looking to come in as conservatively as possible. An independent appraiser will give you a fair estimate for about $250.”
Rejection reason No. 4: Unsatisfactory credit. Nothing foils a mortgage application quicker than a credit report showing a history of late payments, past dues, bills sent for collection, or bankruptcy. Still, some red flags loom larger than others.
“Medical collections are not a big deal as long as you can supply a letter of correction. Student loans are kind of a biggie. Underwriters are concerned with those unless it was just an initial payment missed,” Munson says.
“Anything in the past 12 months is significant. Prior to that, if you can write a good explanation letter, there should not be a problem. The explanation is vital. It can’t be, `I missed a payment because I was sick.’ It should give some detail and history.”
Mortgage lenders are especially sensitive to negative marks that have to do with mortgages, particularly foreclosures and late payments made 16 days after the due date. Most lenders will reject applications if you have more than two late mortgage payments in the last 12 months, experts say.
Severe black marks, such as foreclosures, vehicle repossessions or charge-offs by creditors who’ve given up on collecting a debt you owe, will likely disqualify you for a mortgage, particularly if they’ve happened in the last two years, experts say. Likewise for liens or severe problems with the IRS. “They’re the kiss of death,” says one mortgage broker.
Solution: This is an area where working with a mortgage broker may be your best bet. Not only are brokers used to helping clients deal with credit problems, their ability to shop your loan package can help find a mortgage source that is willing to take more risk than typical lenders. However, you may have to pay higher interest rates–2 to 3 percentage points higher–for a non-conforming loan. Or, you may be required to come up with a larger down payment.
“There is a lot more flexibility than there used to be,” says Munson. “We actually specialize in loans for getting people out of foreclosure.”
Coldwell Banker’s Dress agrees that there are few rejections that can’t be resolved. “As long as the buyer really wants to do it and is willing to pursue all options, where there’s a will there is still a way,” she says.
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Don Hunt and Brian Edwards also write the High-Tech Home column, about technology related to buying, renting and fixing homes. They can be reached via e-mail at hitekhome@aol.com, hitekhme@iserv.net, or you can write to them: The High-Tech Home, Chicago Tribune, Your Place section, 435 N. Michigan Ave., 4th Floor, Chicago, Ill, 60611.
