Mortgage Guide

Been Turned Down For a Loan

A common nightmare keeps most first-time home buyers awake at night: What if I get turned down for my mortgage loan? While it is natural to fret about this worst-case scenario, the chances of it actually happening are quite slim given the popularity of preapproval and the myriad ways mortgage lenders can adjust loan terms to get you the loan you both want.

Still, say it happens and you get the big red "Denied" stamped on your loan application. Here are three things to do right away:

1. Find out what happened

Your lender has 30 days from your application date to explain in writing why the loan was denied. This explanation, called an "adverse action notice," must state a specific reason for the denial. It also will tell you which federal agency to contact if you think the lender or mortgage broker has illegally discriminated against you.

The good news is that the three most common reasons for denial can be corrected in time: insufficient down payment, excessive debt and poor credit history. You can apply again once you have saved more money, paid down your car loan or credit card debt, or raised your credit score by diligently paying your bills on time for a while.

2. Request a second opinion

Some lenders offer a second level of review for mortgage loans to which you can plead your case. You may yet qualify if you can convince the secondary loan reviewer that your credit history was marred by an isolated cataclysmic event, such as unexpected hospital bills that ruined your finances.

3. Keep shopping

Just because one lender turns you down doesn't mean there aren't a dozen ready to approve your loan. Banks and mortgage companies set different underwriting criteria based on their own business objectives. Find one that's right for you.