Quantcast Adverse Action Notices: How to Turn a Mortgage Denial Into an Approval
Adverse Action Notices: How to Turn a Mortgage Denial Into a Home Loan Approval

When it comes to mortgage approval, nearly 86.8 percent of purchase applicants are approved while 13.2 percent are rejected. If you’re turned down, you’ll receive an adverse action notice from your lender. These letters pinpoint the specific reason your application was denied. If this happens to you, you can consider these eight tips to help turn a denial into an approval.

1. Don’t take it personally.

A mortgage denial means you and your loan product are mismatched. Your credit score is 659; the lender’s limit is 660. You don’t meet the guidelines for private mortgage insurance. You want a high-rise, but your lender, like many, won’t lend you money unless 70% or more of the units have been sold. Whatever the reason, know that it’s not personal.

2. Ask for your lender’s opinion.

Adverse action notices should either spell out the principal reasons for the lender’s decision or tell you whom to contact for this information (you’ll typically have 60 days to do so). Your next move depends on the reason the lender provides.

According to HUD, the most common reasons for denial are credit history and debt-to-income ratios (too much debt or too little income). Other common causes include a short job history and income instability. You can lower your debt-to-income by reducing your debt load, buying a cheaper house, refinancing debt to lower payments, choosing a mortgage with a lower interest rate, or seeking a lender that allows higher ratios.

3. Request a second opinion.

Many lenders apply stricter guidelines than the minimum program requirements. For instance, Fannie Mae allows a 620 credit score, but many lenders have established minimums of 640 or higher. These higher minimums are called lender overlays. Lenders may do this to avoid buying back loans from investors if borrowers default.

If you’ve met the program guidelines but were derailed by an overlay, it’s not the end of the world. Contact more home loan providers, ask them about their guidelines (including overlays) and apply, if you think you qualify.

4. Multiple applications won’t hurt your credit.

Applying with multiple lenders won’t affect your credit score if you do so within a certain timeframe. According to MyFICO, “FICO scores ignore inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.”

Tell lenders your scores when you’re shopping, but don’t let them pull your credit until you’ve decided to apply.

5. Get help from your loan officer or broker.

If you’re working with a knowledgeable loan professional, this person should be willing to help and educate you. You can find out more about your application by asking them questions like:

  • How close was I to approval?
  • Is there another program, such as a Federal Housing Administration (FHA) or community mortgage, that might work for me?
  • Can I try again with a smaller loan amount, a lower interest rate, a larger down payment, less debt or more assets?

If you came close, it may not be difficult to receive an approval.

6. It’s a numbers game. Play it!

Most mortgage lenders use software to underwrite mortgage applications. These automated underwriting systems (AUS) generate preliminary underwriting decisions in seconds, allowing loan officers to test alternate scenarios.

If Fannie Mae’s Desktop Underwriter (DU) declines your first submission, your lender could try again with a new scenario, such as buying a less expensive home or saving a larger down payment. If you receive a preliminary approval under a different scenario, you’ll know exactly where to go and what to do.

7. Correct credit report errors.

If your credit score falls below a lender’s threshold, work through your report and make sure it’s accurate. If you lost a few points due to a mistake in your credit history, your lender may be able to fix it by hiring a rapid rescore service.

Rapid rescore services don’t work with consumers, only lenders and credit bureaus. After you submit written proof of error, they can clear problems in a day or two and quickly rescore your credit report. This service costs about $30 per trade line (this is a term used to to describe a credit account. Examples of a trade line could be a line of credit, car loan, mortgage or credit card), and there’s no guarantee your score will increase.

8. Find professional help.

If your credit, income, debt or other issues can’t be quickly resolved, consider hiring a professional. Reputable nonprofit credit counseling services (e.g., members of the National Foundation for Credit Counseling) can teach you to budget effectively, manage debt and boost savings. Debt management plans (DMPs) can help strategically clear your debts. Your counselor may be able to reduce your monthly payments or the interest rates of your consumer accounts, as well.

Mortgage approval isn’t rocket science. Chart your course, stick with your plan, and, eventually, you could pass muster with a mortgage lender.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Owners.com, Altisource or any other Altisource® business or entity. The foregoing content is not intended to constitute, and in fact does not constitute, financial, investment, tax or legal advice by the author, Owners.com, Altisource or any other business or entity.

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