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If Your Loan is Denied

Mortgage Library: Loan Application Process: If Your Loan is Denied

If your application is turned down, federal law requires the lender to tell you, in writing, the specific reasons for the denial. If you fully understand why the loan was denied, you may be able to find answers or alternatives that will satisfy the lender. You may be denied credit for various reasons, including not meeting the creditor's minimum income requirement or not being at your address or job for the required amount of time.

Insufficient income or insufficient funds for down payment. If your loan application was rejected because of your insufficient income to afford the house you want or you have insufficient funds for closing costs and a down payment, you could consider loan programs for low- to moderate-income borrowers with lower down payment requirements.

Federal Housing Authority plays a major role in supporting homeownership by underwriting homeownership for lower- and moderate-income families and first time homebuyers through its mortgage insurance programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. Down payments can be as low as 3 percent, and closing costs can be wrapped into the mortgage.

U.S. Department of Veterans Affairs and the Rural Housing Service offer no down payment loans. In recent years Fannie Mae or Freddie Mac have introduced a wide range of low down payment programs including its Community Home Buyer's Program, Fannie 97® (a 3 percent down payment loan) and FannieNeighbors®. If your household income is no more than your area median income, you are eligible for these loan types. These mortgage loans have more flexible lending requirements and allow you to use more of your monthly income toward housing costs. These programs are administered through participating lenders.

A number of states sponsor programs to help first-time homebuyers and low- to median-income homebuyers qualify for mortgages. These programs typically offer very attractive loan terms with low down payment. Check out on your State Web-site.

Low appraised value of the property. If you requested the loan amount which is larger than 95 percent of the appraised property value, the chances are that loan will be denied. In this situation:

  • You can try re-negotiate with the seller for the purchase price to lower the loan amount;
  • Make additional down payment to cover the difference between appraised value and purchase price;
  • If you think the appraiser undervalued the property suggest that the lender re-examine the appraisal.

Bad credit history The Fair Credit Reporting Act requires a lender that denies your loan application to tell you whether it based its decision on information contained in your credit report. If your loan is turned down because of a poor credit report, you may request a free copy of the report from the credit report company. You have the right to dispute the accuracy or completeness of any information in your credit report. The credit bureau must correct the errors in the report. If there are unsettled disputes over certain accounts, you can include your side of the argument in the report. If there were special circumstances (decease etc.) surrounding old credit problems, ask for a chance to explain.

In some cases, House of Urban Development insures loans for people who have had credit trouble and do not meet standard credit requirements.

If the credit report is accurate and you have a poor credit history, you need to start repaying outstanding balances on time in order to re-establish an acceptable record and then try to apply for a loan again.

If you are still unable to get credit, you can try get a loan with other lender because lenders may have a slightly different qualifying standards or you may wish to ask a friend or relative with an established credit history to act as a co-signer for you. A co-signer promises to repay the debt if you don't.

Related Articles:

Conventional, FHA, VA, and RHS Loans
FHA Programs
VA Guaranteed Home Loans for Veterans
How Much Can You Afford to Borrow?

Credit Counseling
If You Have a Complaint

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