What should I do if my loan application is turned down?
There are two basic reasons why a loan might be denied: the appraisal on the property came in lower than the purchase price or the lender found something unacceptable in the buyer's financial documentation.
A low appraisal can mean that the property sold for a higher price than it should have. If your purchase contract is contingent upon the property appraising for the purchase price, you may be able to terminate the contract without forfeiting your deposit.
Or, the seller may be willing to renegotiate the price.
An appraisal might also come in low because it's based on sales of properties that are not truly comparable to the property in question. Ask your loan agent to give you the addresses of the comparables (called comps) that were used to arrive at the appraised value.
Then consult with a real estate agent who specializes in the area. Ask the agent to provide you with three comps that are a better indication of the property value and submit these to your loan agent for consideration.
If you aren't successful in appealing the appraisal, you might take the entire loan package to another, more-willing lender.
The first thing to do if your loan is turned down due to your 'D financial documentation is to find out specifically what the lender finds objectionable and if there is anything you can do to remedy the situation.
Often a simple letter of explanation to the lender is all it takes to get a problem loan approved.
A common problem for first-time buyers who need 90 percent loans to complete their purchases is that PMI (Private Mortgage Insurance) is required by the lender. PMI usually involves a second approval process. A buyer who is denied PMI approval might bypass PMI altogether if the seller agrees to carry a second loan for 10 or 15 percent of the purchase price.
Many portfolio lenders (lenders who make loans to keep for their own portfolio rather than to sell on the secondary market) self-insure their 90 percent loans so that separate PMI approval isn't necessary. Portfolio lenders also tend to be more lenient on loan qualification in general. Keep this in mind if you need to switch lenders.
FIRST-TIME TIP: Sometimes it's possible to appeal a loan denial, particularly if you can come up with a counterproposal to the lender that will increase the lender's comfort level.
For instance, let's say that your past credit was bad on repeated occasions and the lender denies your application for an 80 percent loan. This lender might approve a loan for 75 percent of the purchase price.
If you don't have the additional 5 percent cash for a down payment, the seller might be willing to loan you the 5 percent rather than have the deal fall apart.
Also keep in mind that you may be able to find a lender who will approve your loan if you're willing to pay a higher interest rate or loan origination fees.
THE CLOSING: How a loan is packaged for the lender can make the difference between whether or not a loan is approved.
This is why you should be completely candid with your loan agent about your financial situation, as embarrassing as this might be. A good loan agent or mortgage broker can help you clean up a messy credit report and help you prepare the necessary letters of explanation if he or she knows in advance the obstacles that must be overcome in order to get your loan approved.
Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif. 94618.