Turndown Series, Volume 1: Was Your Home Mortgage Loan Application Denied?

In this series of articles, David A. Krebs (a licensed mortgage broker specializing in helping people who were "turned down" by banks) explores how borrowers can get approved for a loan by an alternative lender regardless of their situation.

You are disappointed that your bank rejected your home loan application, but this is a very common experience, especially in Florida. Indeed, based on the most recent data collected from thousands of lenders under the federal Home Mortgage Disclosure Act, three of the top ten cities with the highest mortgage denial rates are in Florida – Miami, Orlando, and Tampa. Furthermore, according to a 2018 study regarding “real denial rates” by the Urban Institute, unless you have a high-credit-profile, your chance of being rejected for a home mortgage loan is 32% – nearly one in three.

In other words, you are definitely not alone.

Even more reassuring, many turned-down applicants – even those that have been declined by banks, not once, but even two or more times – can quickly rebound and successfully obtain a loan from another lender that has different or less stringent requirements than banks.

Being declined by your bank is not a dead end. As this article will discuss, the first step is to figure out why your bank turned you down (e.g., poor credit history, excessive debt-to-income ratio). Armed with this knowledge, the second step is to find an alternative lender who is more lenient toward your particular situation (e.g., is willing to accept a lower credit score or a higher debt-to-income ratio).

Step #1: Determine why you were denied

Each year, under the Home Mortgage Disclosure Act, the federal government collects data from thousands of financial institutions across the country (most recent data was from 6,762 institutions) regarding their home mortgage lending practices, and one of the data points collected is “Reason for Denial.” For this entry, the lender can choose up to three reasons from a menu of nine options. Here are the nine denial reasons, ranked in order from most to least common:

1. Credit history
2. Debt-to-income ratio
3. Collateral
4. Credit application incomplete
5. Other (length of residence, temporary residence)
6. Employment history
7. Insufficient cash (for down payment or closing costs)
8. Unverifiable information
9. Mortgage insurance denied

HELPFUL TIP : You have the right to know. Under the federal Equal Credit Opportunity Act (implemented by “Regulation B” or “Reg B”), you have the right to know the specific reasons why your loan application was rejected. The law requires the bank to either (1) provide you an oral or written “statement of specific reasons” for the denial; or (2) simply notify you that you are entitled to the statement if you ask for it within 60 days of such notification. See 12 CFR § 1002.9(a)(2). Therefore, if your bank has yet to give you the required “statement of specific reasons,” you should ask the bank for it. The bank’s statement must be “specific and indicate the principal reason(s)” and cannot simply state, for example, “You did not meet our internal standards.” See 12 CFR § 1002.9(b)(2).

Chances are you may fit into at least two or three of the denial categories, and you may think they are insurmountable hurdles to getting a loan.

However, as the next section explains, alternative lenders have a wide variety of special loan programs that are specifically geared to applicants who were turned down by their banks, even applicants with poor credit history, high debt-to-income ratios, and/or insufficient collateral.

Step #2: Find an alternative lender with the right loan program for you

Many people believe that once their bank rejects them, they have nowhere else to turn. They would be pleasantly surprised to learn, however, that there are many other lenders who, as compared to big banks, have more relaxed requirements and are willing to take on more risk.

HELPFUL TIP : It is okay to shop around. The fact that your bank denied your home mortgage loan application will not appear on your credit report. The only trace left on your credit report will be a notation that your bank made a “hard inquiry” into your credit history before they ultimately denied your loan application. Luckily, hard inquiries only account for 10% of your FICO score. Additionally, there is a built-in allowance for shopping around – after you are turned down by your bank and you apply to other lenders, the hard inquiries made by those lenders will not be treated as additional inquiries, but instead will be aggregated as one (as long as all the inquiries are made within a certain time frame, usually one month).

It is highly likely that your bank denied you because you did not satisfy their strict guidelines, which are known as “lender overlays” or “bank overlays”. The federal government sets official minimum standards, but most mortgage lenders are more conservative and therefore apply additional guidelines on top of the official standards, hence the term “overlays.”

For example, while the Federal Housing Administration might require a minimum FICO score of 580, most lenders instill overlays depending on their risk appetite and may require a higher minimum FICO score of 620 or 640. As mentioned above, one of the top denial reasons is poor credit history, and bank overlays may be the culprit for your rejection.

The key, therefore, is finding a lender who imposes fewer restrictions or overlays than your bank, which will boost your chances of getting approved. No matter what the reason was for your loan being denied (see above for the 9 main reasons), there is a loan program out there for you.

SPOTLIGHT – LOAN PROGRAMS: We highlight some notable, creative programs:

Did your bank decline you because you recently went through an event that adversely affected your credit history? Some lenders are willing to make loans to individuals who are just 1 day out of bankruptcy, short sale, foreclosure, or deed in lieu of a foreclosure.

Was your credit score too low? Some lenders accept FICO scores as low as 580 or even 500.

Was your debt-to-income ratio too high? Some lenders accept debt-to-income ratios that are as high as 50 to 55%. Also, to help lower your debt-to-income ratio, some lenders consider a variety of alternative income streams, such as rental income, boarder income, and Airbnb, VBRO, or HomeAway income. Further, some lenders will consider your financial assets as income to help qualify you for a loan, e.g., savings accounts, mutual funds, and even bitcoin/cryptocurrency.

Was your loan-to-value ratio considered too high? Some lenders are willing to accept loan-to-value ratios as high as 90 to 97% to offer you the higher loan amount you are seeking.

Did your bank require extensive paperwork? Other lenders with less stringent guidelines are willing to accept less documentation or alternative forms of documentation ( e.g., bank statements or W2s/1099s, instead of tax returns).

A mortgage broker can help you find the needle in the haystack:

• Wading through the guidelines and overlays of multiple lenders and contacting them directly is difficult, if not impossible.
• As a practical matter, lenders typically do not publish their overlays, but instead distribute them exclusively to banking officials such as licensed mortgage brokers.
• Also, it is simply not feasible to even find the lenders – many alternative lenders do not advertise widely, but instead rely on mortgage brokers to refer them potential borrowers.
• A good mortgage broker with strong connections can quickly and simultaneously shop your loan at several different lenders for the best possible interest rate and terms.
• Additionally, mortgage brokers are accustomed to helping individuals who were previously declined for a loan by their banks.
• In short, working with a mortgage broker gives you access to a variety of lenders and more options.

SPOTLIGHT – CLOSED DEALS : Here are examples of how we helped individuals, who were previously turned down by their banks, obtain home mortgage loans:

On behalf of a client with a low credit score in the 500s and numerous collections on her credit report, we obtained a $520,000 cash-out refinance to allow her to use the proceeds to save her home from foreclosure.

On behalf of a client who had been unemployed for a few months, we used the lender’s bank statement program to prove the client had the capacity and cash flow to repay the loan, and obtained a $240,000 purchase loan to allow him to buy a new home and relocate with his family.

Conclusion

You are now armed with the knowledge that (1) being denied for a home mortgage loan is very common, especially in Florida; (2) you have the right to know the specific reasons for the denial; and (3) there are plenty of alternative lenders who would be willing to embrace your particular situation and lend you money.

David A. Krebs is a licensed mortgage broker offering commercial and residential loan programs beyond your regular bank. Call us at 321-239-2781, click here to submit a message, or click here to book a free consultation. Learn more at our website here.