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What To Do If Your Mortgage Application Gets Denied

You’ve been denied for a home loan. Now what? For many borrowers this means going to another lender to get a second opinion. After receiving that first denial letter, the internal thought process would go something like this: “Wells Fargo wouldn’t give me a mortgage. Maybe I could get Quicken Loans to do it.” That sounds like a good plan, right? Not if you know a thing or two about how the mortgage market works.

It is not that bank underwriting guidelines don’t differ; they do, just not as much as many borrowers would like to believe. For the vast majority of correspondent banks, underwriting guidelines are – in large part- determined by which mortgages Fannie Mae and Freddie Mac are willing to purchase on the secondary market (which is why underwriting is so important). For example, if a borrower has a credit score between 600 and 619, that borrower will most likely have to demonstrate at least two compensating factors (i.e. increased income, demonstrated ability to pay housing expense, minimal increase in housing expense, or substantial cash reserves) regardless of which lender they chose.

Instead, the best approach to take after receiving a loan denial is to have a candid conversation with your loan officer to find out the specifics. Was it your credit score? Cash reserves? Down payment? What about your debt-to-income ratio? Each of these reasons for denial can be remedied – provided that you know exactly what you are up against. Armed with this information you can do one of two things: (1) fix the problem that caused your mortgage application to be denied, or (2) do your research on portfolio lenders (or even subprime lenders if credit was the reason for denial) that may have more flexible guidelines.

At the end of the day, it is important to understand your own personal financial situation and how that fits in with each banks guidelines. Start with your loan officer – they will be your best resource. Then do your research. You can refer to the Fannie Mae and Freddie Mac eligibility matrices to see exactly what the underwriters are looking at when making a lending decision. The more you know, the better your chances are of both qualifying for a mortgage and getting a great rate.