What Can I Do If My Mortgage Application Is Denied?

Start with the denial notice. Federal rules require the lender to tell you in writing, within 30 days of receiving your completed application, the specific reasons it turned you down or how to request them, and if your credit report played a part, the notice also gives the credit score it used and your right to a free copy of the report. Use those reasons to fix the cause before reapplying with the same lender or a different one; if you're under contract, first check the deadlines for keeping or canceling the purchase.

What must the denial notice tell you?

The Equal Credit Opportunity Act and its rule, Regulation B, set the contents of what lenders call an adverse action notice:

• The decision, in writing, within 30 days after the lender has your completed application.
• The specific reasons, or a statement that you can ask for them. If the notice gives only the second, request the reasons within 60 days and the lender must send them within 30 days. A reason such as "you did not meet our internal standards" is not specific enough. The CFPB's official interpretation says listing more than four reasons is not likely to help you.
• The federal agency that oversees the lender, with its address. That is where you can file a complaint if you think the lender denied you on a basis the law prohibits, such as race, sex, age, or receipt of public assistance.

If the lender used your credit report, the Fair Credit Reporting Act adds these items:

• The credit score it used, the range of possible scores, and the main factors that hurt your score.
• The name, address, and phone number of the credit bureau, and a statement that the bureau did not make the decision.
• Your right to a free copy of that bureau's report if you ask within 60 days, and your right to dispute anything inaccurate in it.

Two related situations get different notices. If your application was missing documents, the lender can instead send a written notice listing what it needs and giving a reasonable deadline; send the items by then and the review continues. If the lender offers different terms, such as a smaller loan or a different loan program, that is a counteroffer, and you can accept it or decline it.

You are also entitled to a free copy of every appraisal on a first mortgage, even when the loan is denied. Ask for it if the lender has not sent it.

Why do mortgage applications get denied?

Lenders report denial reasons to federal regulators under the Home Mortgage Disclosure Act (HMDA), and a lender can cite up to four reasons per application. Reporting categories include:

• Debt-to-income ratio.
• Credit history.
• Collateral (the appraisal or the property).
• Other.
• Not enough cash for the down payment or closing costs.
• Information the lender could not verify.
• Incomplete application.
• Employment history.

How do you fix a debt-to-income denial?

Your debt-to-income ratio (DTI) is your monthly debt payments, including the new house payment, divided by your gross monthly income. Limits depend on the loan and how it is underwritten:

• Fannie Mae conventional loans: up to 50% when its Desktop Underwriter system approves the loan; 36% when an underwriter reviews it by hand, or up to 45% with the required credit score and cash reserves.
• FHA loans reviewed by hand: 31% for the housing payment and 43% total, rising to 37% and 47% with one compensating factor, such as 3 months of payments in savings after closing, or 40% and 50% with two, if your score is 580 or higher.

Example. Gross income is $6,000 a month. Debts are a $450 car payment, a $300 student loan, and $150 in card minimums, or $900. The proposed house payment is $2,300.

• DTI: ($900 + $2,300) / $6,000 = 53.3%, over the 50% limit.
• Pay off the car loan: ($450 + $2,300) / $6,000 = 45.8%.
• Or keep the car and target a $2,000 house payment: ($900 + $2,000) / $6,000 = 48.3%.

Other options are adding a co-borrower whose income counts, or documenting income the lender did not count the first time. How debt-to-income ratio works covers which debts are included.

How do you fix a credit history denial?

1. Get your reports. Use the free report from the notice, and you can also check each bureau once a week at no cost at AnnualCreditReport.com.
2. Dispute errors with the credit bureau and with the business that reported the information. The bureau generally has 30 days to investigate, or up to 45 days if the dispute follows a free annual report or you submit relevant additional information during the initial 30 days. It must send you the results in writing. The CFPB says correcting an error could raise your scores in 30 days or less.
3. Lower card balances and pay every account on time. The CFPB says a borrower who does this could see a score improvement in three months or more.

If the reason was a recent bankruptcy or foreclosure, you may face a waiting period; getting a mortgage with a bad credit score lists them by loan type. If you were denied for having no credit history, see qualifying with no credit history.

What if the appraisal caused the denial?

A collateral denial means the home's value or condition did not support the loan, for example when the home appraised for less than the price. Read the appraisal and check the square footage, condition, and comparable sales. If the problem is a low valuation, your options include:

1. Ask for a reconsideration of value. For loans sold to Fannie Mae, lenders must offer one borrower request per appraisal, submitted before closing, that points out the errors and adds up to five comparable sales with an explanation. For FHA loans, the underwriter may ask the appraiser to reconsider when relevant information was missed.
2. Renegotiate the price with the seller to the appraised value.
3. Pay the difference with a larger down payment.

If the denial concerns the property's condition, ask the lender which repairs or inspections are required. A lower price or larger down payment does not cure disqualifying defects. For Fannie Mae loans, the lender must confirm that the property meets its condition requirements and document completion of required repairs before selling the loan to Fannie Mae.

If your purchase contract has an appraisal contingency, it may let you cancel by its deadline if none of these works.

When and where should you reapply?

You can reapply as soon as the cause is fixed. A denial does not start a waiting period by itself; waiting periods apply to events such as bankruptcy and foreclosure. Before you apply again:

1. Protect any current purchase contract. Ask your agent or attorney to check your financing contingency (a right to cancel if financing falls through), termination-notice requirements, and closing deadline. Credit repair or another application does not extend those deadlines. Get the seller's written agreement to an extension or use any available cancellation right on time; missing a deadline can put your deposit at risk.
2. Match the fix to the reason. Reapplying with the same DTI or the same credit report will likely produce the same result.
3. Consider another lender or program. Lenders can set stricter rules than FHA, Fannie Mae, or Freddie Mac require, so one lender's denial does not mean every lender will deny you. A broker can send your file to several lenders; see using a mortgage broker with bad credit.
4. Shop within a short window. The CFPB says most scoring models treat mortgage credit checks within a 14- to 45-day period with little or no effect on your score; see how multiple applications affect your credit.
5. Get preapproved before you make another offer, so the lender reviews your credit and income first. See how to get preapproved.

A HUD-approved housing counselor can review your denial notice and plan with you, often at little or no cost. Find one at consumerfinance.gov/find-a-housing-counselor or by calling (800) 569-4287. For where a denial can happen from application to closing, see the mortgage approval process.