Rejected for home loan? Here's a good game plan

Don't be surprised if your friendly lender, the one who invites you to sit down and apply for a mortgage, ushers you politely out the door empty-handed after you've chatted a bit.

The sudden chill isn't personal. The Mortgage Bankers Association, or MBA, in Washington, D.C., estimates that about half of all mortgage applicants are now being turned down.

Though refinancing approvals remained static, the acceptance rate on mortgage applications suffered a 10 percentage-point drop, from 63 percent in the first half of 2007 to 53 percent in the first half of last year, according to mortgage data tracked semiannually by the association.

Since then, further tightening of credit standards means at least half of mortgage-seeking consumers can't squeeze through to acceptance, says MBA spokeswoman Carolyn Kemp.

Instead of yielding to shame, anger or any of the usual emotions associated with rejection, today's consumers who are intent on buying or refinancing should adopt a pragmatic stance, since clear-eyed determination may eventually land them a loan.

Here's how.

Landing the loan: If you've submitted a formal application, federal law dictates that you're entitled to a formal rejection.

Expect an "adverse action" notice, spelling out the reasons for turning you down, which these days is likely to state that the loan amount you're seeking is too large compared with the current appraised value of your home, says Joe Theisen, president of the Wisconsin Mortgage Professionals Association and branch manager of Fairway Independent Mortgage in Madison, Wis.

If it's not your home's value that's the issue, it may be your personal credentials, such as your creditworthiness, work history or debt load.

When credit is the issue, an adverse-action notice is required, naming the credit reporting agency that provided the data on which the lender based its decision, according to Federal Trade Commission rules. You're also entitled to a free credit report; see the FTC Web site for more information.

Given the odds of acceptance, a lender may not require you to pay a few hundred dollars to submit a formal application, which includes the cost of a professional appraisal on the property.

Instead, he may pull a credit score and tell you what you're likely eligible for, says Marc Savitt, president of the National Association of Mortgage Brokers.

Find a fix: Qualifying for a mortgage isn't a black-and-white issue. Rather, different loans at varying rates may be available, depending on how risky a lender thinks a particular mortgage will be. If you don't qualify at 5.5 percent, for instance, you may be able to get the nod for a loan at 6 percent or 6.5 percent.

However, many borrowers, especially those who are refinancing, need a certain rate to reach the monthly payment they want.

Not only are rates higher for risky loans, but there are now upfront "point" charges dictated by Fannie Mae and Freddie Mac, the two big mortgage guarantors currently under government control, Savitt says.

To get a good rate, some borrowers may be able to make changes — like lowering the amount of the loan they seek.

When a borrower isn't far from the qualifying mark, he may be able to reapply and be approved relatively quickly. For instance, if you're within reach of a 740 credit score, which is usually required for the best rate, you might pay down a balance on a credit card and hit the target, Theisen says.

Seek out other opinions: Not every lending firm adheres strictly to the same playbook, and one lender may approve what another rejects, says Savitt, who recently had a borrower with good credit turned down for a low-down-payment, government-insured loan, but found another firm giving the green light.

A local "community bank," meaning a smaller, hometown institution, may be more flexible, contends Diane Scriveri, chief lending officer at Bogotá Savings Bank in Teaneck, N.J., and vice chair of the affordable housing committee of the New Jersey League of Community Banks.

"Because we're local, we may know home values better. We still use independent appraisals of course, but we may look at comparable (home values) differently because we know what's really happening in different neighborhoods," she says.

Credit unions, which only offer loans to consumers who qualify for credit union membership, may also be more forgiving, says Tony Emerson, president of the Credit Union League of Connecticut.

"It would be foolhardy to suggest that in every case, you can go to a credit union and get a loan," Emerson says.

Still, he says, some credit unions may judge loan eligibility based upon the unique relationship they have with their members.

For instance, many credit unions offer membership to employees of specific companies and would know more about a member's job stability, he says.

Give it another try: The Mortgage Bankers Association is predicting that 30-year fixed rates will hover near the 5 percent range through 2009. So if predictions hold and interest rates stay relatively low, you should have time to try again if the factors behind your rejection improve.

Fortunately, a rejection shouldn't bring down your credit score, says Craig Watts, public relations director for Fair Isaac Corp.

Making a formal application and then reapplying more than a month later could lower your score, but only by about 5 points.

Most scoring systems allow consumers to make multiple mortgage applications within a 30-day period without any negative impact on their credit score.

But mortgage inquiries older than 30 days will count as a single inquiry if they're made within a 14-day or 45-day window, depending on the scoring model used.