A decline of your mortgage loan application can be discouraging. However, instead of getting frustrated, you can follow the steps below to understand the reasons for decline and address the causes so that you can obtain the loan you need.
The first step is to identify the exact reason for the decline so that you can respond to the decline reasons appropriately. Start with the adverse action letter (also known as the decline letter) which provides up to four reasons for decline. Additionally, call your loan officer and have him walk you through what caused the decline. Don’t settle for simple answers such as “credit history”, or “low income”. Spend time on understanding the nuances with the credit decision. For example, you should ask whether the decline was due to low credit score, lack of score, or the inability to obtain a credit report. Similarly, was the loan declined due to low income to support the payments, or did the underwriter feel that your income is not likely to continue in the future? Did they include all your income sources?
If the adverse action letter does not contain the decline reasons then you have a right to request a statement of specific reasons for decline. The request for a statement of specific reasons must be made within 60 days from the date when you were made aware of the adverse action.
The adverse action letter will tell you if your loan was declined based on the information provided by consumer reporting agencies. If this is the case, then you have a right to obtain a free copy of a credit report from the consumer reporting agency. The decline letter will identify the consumer reporting agencies that provided the credit reports. You have a 60-day period from the date of receipt of decline letter to obtain a free copy of the consumer’s report. You should exercise your right and obtain the free credit report.
One thing to keep in mind is that you only have right to free credit report, and not the credit scores. The consumer reporting agencies will charge you for providing the credit score. However, before you start paying for the credit score, you should look at the adverse action letter which contains the credit scores. Therefore, you don’t need to pay for the credit score to the consumer reporting agencies. Instead, simply get the free credit report.
The risk based pricing disclosure is another document that contains credit scores. You would have received this document from the lender in the early stages of the loan application when the lender obtained your credit report. The document generally has the title “Your Credit Report[s] and the Price You Pay for Credit”.
If the decline was based on information that is not contained in credit reports then the adverse action letter may not contain the credit score. However, in this case you do not need to pursue the credit scores since they were not the determining factor for the decline of your loan application.
Review the report to ensure that all the information is correct in the credit report. Focus on both credit history and personal information that appears on the credit report. Credit history includes account balances, payment history, credit limits, etc. Credit history affects your credit score. Personal information includes your name, address, date of birth, etc. Review personal information to ensure it is correct and is not preventing your lender from obtaining correct report. Also, review any credit inquiries, collections, bankruptcies, and judgments to ensure they are all valid and accurate.
If any information is inaccurate then file a dispute with the consumer reporting agency to have it corrected.
If the lender charged for an appraisal report, then ensure you have received a copy of the appraisal report. Since Jan 2014, Regulation B requires the lender to send you a copy of the appraisal report.
Review the appraisal to identify if the appraised value of the property was inline with your expectations. Also, if the lender cited information in the appraisal as cause for decline, then verify that such information is correct.
Review all the fees you have paid as part of your loan application. Was any fee refundable? If yes, have you received the refund? If not, then follow up with the loan officer to obtain the refund.
After understanding the root cause of the decline, the next step is to have a plan of action to address the loan decline. Some things may be corrected immediately and you may reapply for the loan at the same lender or at another lender. For example, if the cause was incomplete application, then you should find out what documentation was missing and re-apply once you have obtained the required documentation.
However, in some cases you may have to work on the factors that led to the decline. For example, if your credit score is low, then you should have a plan for improving the credit score. In another case, if your employment history is insufficient, then you should wait till you have the minimum required tenure (such as at least two years of employment history) before re-applying for the loan.
The re-application of the loan will be considered with a fresh evaluation of your needs and your personal circumstances. By the time you re-apply, you should have addressed the reasons that caused the loan to decline.
Consider whether you want to apply with the same lender that declined your loan or with a different lender. Working with the same lender may help in terms of providing fewer documents than working fresh with another lender. However, don’t feel obligated to work with the lender that declined you. Not all lenders offer all types of loans. Your particular circumstances may require a particular loan that is offered by a different lender. It is always a good idea to inquire with different lenders to see if they have a loan product that you can apply for.
If you believe your loan application was wrongfully declined then you may consider filing a dispute or a complaint.
Updated: Feb 17, 2016