This is the first Ask the Mortgage Expert column by Mr. Anastos, an authority on residential home loans, president of loanDepot’s Mortgage Master retail division, and a frequent speaker at national mortgage and finance events. He kicks things off with common questions about denied applications . . .
Q. What tips do you have for home buyers whose applications were denied? Are lenders required to tell you why they denied your application? What percentage of home loans are denied now as compared with 2006? How can a home buyer improve his or her chances of not being rejected a second time?
A. The two most common reasons home loan applications aren’t approved are low credit scores or a high debt-to-income (DTI) ratio. The good news is that lenders are required to tell borrowers why their loan applications were denied and provide a free copy of the credit report used in the decision-making process. This helps borrowers address areas of concern so they can improve their chances of an approval next time.
While it may seem like it’s harder to get a home loan these days, denial rates are actually down from 2006. In fact, in 2014 (the most recent year data are available), only 13 percent of mortgages and 31 percent of refinance applications were denied. This is down from 2006, when 18 percent of mortgages and 40 percent of refinance applications were denied. Why the decline? One reason is that some potential borrowers think it’s too difficult to qualify for a home loan, so many don’t apply. Potential borrowers should request a copy of their credit report and credit score and then contact a home loan professional for guidance through the preapproval process. They may be pleasantly surprised to find out that they do qualify.
Today’s borrowers have many options, and in some cases, they just need to take simple steps to improve their credit:
Get your finances in order. Carefully review the credit report the lender provides to make sure it’s free of inaccuracies. If you see errors, get documentation, and then ask the credit bureau to remove the mistakes. There are three major ones: Equifax, Experian, and TransUnion. Don’t assume that each credit bureau has the same information pertaining to your credit history. Check with each one for inaccurate information. Most offer consumers a free report once a year. After the error is corrected, ask the lender to review your application again.
Calculate your DTI. You can use an online calculator such as the one found at www.credit.com/calculators/dti. If your DTI exceeds 43 percent, you’ll need to eliminate debt in order to get down to an acceptable level before reapplying for a mortgage. The easiest way to do this is to pay down credit card balances. Figure out exactly how much you are paying each month on balances and fees, and set up a prepayment plan that fits your budget. You could also consider moving some of your credit card debt to new lower-interest accounts.
The length of time before you can reapply depends on the reason for the initial denial. If it’s due to a low credit score or high DTI ratio, you should consolidate or pay down debt before reapplying.
Another common reason for denial is the home’s value. Many people apply for a loan with an estimate of the home’s value, sometimes obtained from online resources. Once the loan process begins, however, an independent party will complete an appraisal. The final determination of value is what helps drive a borrower’s loan-to-value ratio (LTV). That ratio is the current appraised value of the home compared with the mortgage amount. If the value comes in lower than expected, this can lead to a decline in the loan-to-value ratio. In this case, comparable home sales in the area may determine how long you wait before reapplying for a home loan.
For homeowners who are refinancing, you may want to consider adding additional cash to get to the point where your loan-to-value ratio is 80 percent or lower. For example, if you have an existing mortgage of $170,000 and your house appraises at $200,000, your LTV would be 85 percent, which means you may not qualify for a conventional loan. But if you put down an additional $10,000 in cash, your LTV decreases to 80 percent. It might be well worth it if you can refinance at today’s low rates, as the amount of money you save could make up the difference.
If you are buying a home and the appraisal comes in low, you may want to negotiate with the sellers to see whether they will lower the sales price enough for you to qualify. If you are not far apart, many sellers would prefer to lower their price a little to save the deal. However, you should know that there are many home loan products available that do not require an 80 percent LTV. You should speak with a trusted, licensed lending officer, who has access to various mortgage products, to discuss all of your options.
Finally, borrowers can also be denied if they cannot document their employment history, income, sources of income, and where funds for the down payment came from. It’s a good idea to get all of these documents together before you apply for a loan.
AskPaul@mortgagemaster.com. Follow him on Twitter @paulanastos.