Photographed by Matilda Hill-Jenkins.
The go-to home-buying analogy is a marathon versus a sprint, when a more apt comparison might be an iceberg. There's the behemoth you see above water and a whole lot of potential drama down below.
Before you hit fast forward to the part about the unexpected costs of fixing up a home, know there may be some surprising setbacks when you try to secure a mortgage in the first place. One out of every eight home loan applications were rejected in 2015, according to the Federal Reserve. The Washington Post noted that people seeking government backed loans were rejected at an even higher rate (14%).
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Figuring out what to do after a denial can be frustrating, since you likely won't be told why. "Mortgage brokers and most banks don't tell you because they don't like to take the compliance risk of telling you the exact reason, and a lot of times, they don't even know because the systems don't talk to each other," says Vishal Garg, the founder and CEO of Better.com, a digital mortgage company.
Still, hazarding a guess is doable enough. Ahead, here are some ways to rebound if you were turned down for a mortgage.
Check Your Debt-to-Income Ratio
Your debt-to-income ratio is the sum of all your monthly payments on all the loans you carry, divided by your monthly income. The federal government has an eligibility cutoff of 43% for "qualified" mortgages, so if your own ratio is above that, take a second look at your finances.
Before you apply again, pay down any revolving consumer debt (if you have rollover credit card debt). If you still have lingering student loans, your DTI ratio may count against you. Garg says this is where alternative brokers and lenders can come in.
Companies and organizations like his work directly with Fannie Mae to secure loans, so they don't impose additional underwriting criteria — like the 43% standard — that would disqualify some prospective homebuyers. "For some buyers, you can actually go up to a 50% debt-to-income ratio, so try to work with a lender that's a Fannie-direct lender and will allow that," he suggests.
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There is a limit — the Post notes that a DTI of 58.3% is "way too high for most lenders and not a smart idea for you personally" — so make sure that your desire is reasonable.
Review Your Credit Score
Another major reason for missing out on a mortgage opportunity is your credit score. Garg says most of the big banks (think Chase, Citi, Wells Fargo) won't finance people with FICO scores under 700.
Because of those aforementioned internal underwriting criteria, "a lot of first-time or younger homebuyers [who] have student loans or credit cards that place them in the 680 to 700 range — or even 640 and up — will typically get rejected by a bank, even though Fannie Mae would allow them to buy a home and get a home mortgage," he explains.
If you're on solid financial ground, but don't yet look like an optimal loan candidate (maybe you're still waiting out an old ding on your credit report that is impacting your FICO score), non-traditional mortgage lenders and organizations can help here, too. Mercy Housing works in service of rural communities, and the Housing Assistance Council (HAC) funds nonprofits and works with local government agencies that assist families and individuals. Another option, Springboard Home Loans, shepherds first-time buyers through the process.
Dan Stern, the communications and outreach manager at HAC, recommends that people seeking direct assistance search for resources through HUDExchange or the services of a local housing counseling agency.
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Companies like Better can do a (free) soft pull to see where you're failing short — but you should also do the same on your own to fix what you can.
Grow Your Down Payment — Or Get Help
Garg says the third major reason he sees mortgage candidates be rejected is when the amount they are putting forward as a down payment falls far below the conservative 20% standard.
Financially responsible people who want to get the jump on buying a home, but have less disposable income to do so because of things like student loans — rather than a mountain of credit card debt — should look toward first-time home-buyer programs, Garg suggests. Many of them are hyper-local and tied to the government, but others are run by nonprofit community organizations.
Garg says typical Better applicants who have success going that route are "young professionals who don't earn large incomes— teachers, nurses, medical residents — who may be a 38-year-old first-time homebuyer, have one or two kids or are expecting, have been renting for 10-12 years, and therefore have a verified rental payment stream and income. And frequently are doing somewhere between 8-12% down."
Many of those candidates are in two-income households jointly earning $100,000-$150,000, but single applicants can put even less down in some cases.
Keep Track Of Patterns
Research has shown that even half a century after the passage of the Fair Housing Act, discriminatory lending practices based on race still persist — even when there is little difference among the financial profiles of white and non-white borrowers.
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Working with the Federal Reserve and Department of Justice, the Center for Investigative Reporting trawled through 31 million Home Mortgage Disclosure Act records and found that race-based disparities in lending are persistent across the country, "even when controlling for applicants' income, loan amount and neighborhood." And many of the big banks, from Bank of America to Wells Fargo, have settled or been charged with cases of discriminatory lending practices.
Unfortunately, there's no easy fix to this issue. Andrew Scherer, the policy director of the Impact Center for Public Interest Law at New York Law School, explains that proving discrimination has become difficult since fair housing laws were enacted in the 1960s. (After all, these days, not as many people will come right out and say, "I won't lend to women or people of color.")
Advocates may do work like sending "testers" (people of different races, for example, but of similar employment and household income) to observe any patterns in how people are treated. But if all you have is a suspicion without hard proof, you'll have a more difficult time moving forward. "You can complain to one of the fair housing agencies," Scherer suggests. "In New York City, it’s the New York City Commission on Human Rights. At the state level, it's the state Division of Human Rights, and at the federal level, it's HUD's office of housing discrimination."
If they believe there is probable cause to move forward (something that may be difficult under the current administration), you could file a lawsuit directly. "But you need to either have the wherewithal" — i.e., money — "to do this, or find a housing discrimination lawyer who felt you had such a good case they would take it on a contingency basis," Scherer adds.
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None of those are easy paths. In the short term, a "fix" may be to find a cosigner who can help boost your good standing, or try and try again.
This article has been updated with comment from the Housing Assistance Council.
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