Go to any mortgage lending website, and you'll see images of smiling families and beautiful homes accompanied by text that makes it sound like lenders are standing by just waiting to help you find the loan that works for you no matter what your situation. (To learn more about mortgages, see Mortgage Basics.)
But the truth is that lending such large amounts of money is a risky business, and that money isn't handed over to just anyone. If your home-ownership fantasies have been rudely awakened by loan officers denying your application, it's time to take control of your situation and learn what you can do to turn that rejection into an approval.
Everyone's financial situation is unique. With that in mind, here are six different options for making your homeownership dreams a reality.
If your income isn't high enough to qualify for the loan you need and if you can find a cosigner with enough disposable income, part of that person's income can be considered toward your loan amount regardless of whether the person will actually be living with you or helping you make the monthly payments. In some cases, a cosigner may also be able to compensate for your less-than-perfect credit. Overall, the cosigner is guaranteeing the lender that your mortgage payments will be paid.
If you decide to go this route, just make sure that both of you understand the financial and legal obligations the cosigner takes on when he or she signs the loan documents. If you default on your mortgage, the lender can go after your cosigner for the full amount of the debt. What's more, not only will your credit score plunge, but your cosigner's will too.
Of course, you shouldn't take this route if you know you aren't responsible or rich enough to pay the mortgage on time. But if you have income that a lender isn't willing to consider (such as self-employment income) and you and your cosigner are both confident that you can make the payments on your own, then getting a cosigner may be a good option. (Find out more in "Getting a Loan Without Your Parents" and "Mortgages: How Much Can You Afford?")
Sometimes conditions in the economy, the housing market or the lending business make lenders less generous with loans. If you're in a climate where everyone is panicking, then it may be best to wait things out. When conditions improve, lenders may become more accommodating.
In the meantime, you can work on improving your credit score, reducing your debt and increasing your savings. While you're waiting, home prices or interest rates could drop. Either of these changes could also improve your mortgage eligibility. On a $290,000 loan, for example, a rate drop from 7% to 6.5% will decrease your monthly payment by about $100. That may be the slight boost you need to afford the monthly payments and qualify for the loan.
If you can't qualify for the amount of mortgage you want and you aren't willing to wait, switching to a condo or townhouse instead of a house, accepting fewer bedrooms or bathrooms, or moving to a less attractive or more distant neighborhood may give you more options. As a more drastic option, you could even move to a different part of the country where the cost of home ownership is lower. When your financial situation improves down the road, you might be able to trade up to the property, neighborhood or city where you hope to end up.
Believe it or not, it is possible to ask the lender to send your file to someone else within the company for a second opinion on a rejected loan application. In asking for an exception, you'll need to have a very good reason, and you'll need to write a carefully worded letter defending your case.
Your letter should avoid excuses and sob stories and focus only on the facts. Explain how the incident that is preventing your loan from being approved, such as a charged-off account, was a one-time event that will never occur again. This one-time event should have been caused by a catastrophe such as a large and unexpected medical expense, natural disaster, divorce or death in the family. The blemish on your record will actually need to have been a one-time event, and you'll need to be able to back your story up with an otherwise flawless credit history.
Sometimes one lender will say no while another will say yes. If the first lender you approach rejects you, there's no reason not to try out a few other options. If every lender rejects you for the same reason, though, you'll know that it's not the lender that's the problem, it's your financial situation. Your only choice at this point is to fix the problem.
When shopping for a second opinion, don't give lenders any inkling that you are feeling even remotely desperate for a loan or they may take advantage of you by tacking higher fees onto your loan or raising your interest rate. Of course, if you are a higher-risk borrower, you may encounter some of these fees no matter what.
Two incomes are better than one, so if you can't qualify on your own, perhaps you have a family member or friend that you trust enough and like enough to make a major purchase with and live with. It won't be enough to just put them on the loan, of course – they'll need to actually help with the mortgage payments to make it work, and chances are they won't want to pay half the mortgage unless they're living in the new home with you.
To go from rejected to pre-approved, it's important to know what lenders are looking for in an applicant. (For general thoughts, see "4 Tips for Getting Approved for a Bank Loan.") If you've been turned down for a mortgage, make sure to ask the lender plenty of questions about things you could do in your specific situation to make yourself a more attractive loan candidate. With time, patience, hard work and a little luck, you should be able to turn the situation around and become a residential property owner.