A common fear 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 most every borrower a loan of some kind.
Still, say it happens and you get the big red "Denied" stamped on your loan application. Here are three things to do right away.
Your lender has 30 days from your application date to explain in writing why your 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 later, once you have saved more money, paid down your car loan or credit card debt, or raised your credit score by diligently paying bills on time.
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 reviewer that your credit history was marred by an isolated cataclysmic event, such as unexpected hospital bills that ruined your finances.
Just because one lender turned you down doesn't mean there aren't a dozen others willing to approve you. Banks and mortgage companies set different underwriting criteria based on their own business objectives. Find one that's right for you.