What to do when a loan application is denied
A loan rejection isn’t the end of the road if you know where to turn
If your client’s home loan application gets rejected, you can guide him or her to another financing option. The credit industry took quite a hit about 10 years ago. Leading up to around 2008, it seemed like anyone could get a home loan. Then the credit crisis shook the mortgage industry and suddenly it seemed no one could get a mortgage.
Today, lenders have settled into a more traditional role and follow a set of common sense lending guidelines. While these guidelines have made it easier to get approved for loans, people still get turned down every day. Fortunately, there are other options for buyers who can’t qualify but still want to own a home.
If you have clients in this situation, advise them of the following financing solutions.
1. Ask the sellers to finance the purchase
Seller financing has long been a way for buyers to purchase a home they can’t quite get approved for. The sellers agree to a price and set the loan terms, just as a mortgage company would do. Sellers will want to know why they’re being asked to help finance the purchase, and your clients should expect to provide a copy of their credit report.
A recently self-employed individual might have to go this route. Most mortgage programs will require your clients to be self-employed for at least two years and provide copies of their last two income tax returns to prove it. If your clients have been self-employed for only one year, they will just have to wait.
If the situation seems to make sense to the sellers, they can collect a down payment and set their interest rate a bit higher than what a mortgage company would charge.
This loan would be short term, just like a private or hard money loan.
2. Prepare a land contract
A land contract is a form of seller financing that prevents the buyers from owning the home until the loan is paid in full; it’s more of an installment loan than a regular mortgage.
If the buyers default on the loan, the seller can take possession of the home and retain all the money. Rates and terms are written in a private note, and installment payments are made until the loan is retired.
It’s important to note that if there is an existing mortgage on the property, there will be what is called an “acceleration clause” or “due-on-sale clause,” which kicks in if the home is sold.
3. Explore a private loan
Your clients have the option to explore private lending. While not as common as seller financing or land contracts, a private loan is certainly a viable solution.
Private lenders can establish their own internal lending rules without having to conform to third party guidelines. If the deal makes sense, a private lender can consider the project.
This option is great for clients with odd pay schedules because private lenders tend to look at borrowers’ overall financial state, rather than specifics.
A private loan usually calls for a higher down payment and interest rate, but it is still a good option for people who are unable to get approved for a traditional loan.
4. Search for a niche lender
Delving deeper into the world of private lending will lead you to a niche often referred to as “hard money.”
It’s called hard money because down payment requirements are greater, rates are higher and the loan is more costly overall.
So, why would anyone touch a hard money loan?
These loans fill a need in the real estate industry by financing projects most lenders wouldn’t touch; maybe the buyers have bad credit but lots of money for a down payment, or perhaps the property is in really bad shape.
A hard money loan can be used to finance the purchase and any rehab work the property needs.
Hard money lending is primarily used by real estate investors who search for distressed real estate to buy, repair and flip.
5. Find a CDFI in your area
A Community Development Financial Institution (CDFI) is a private lending entity certified by the U.S. Department of the Treasury. It’s primary goal is to finance affordable housing and create economic opportunities for both individuals and small businesses.
CDFIs can get their funding directly from the Treasury Department, private individuals or by working in concert with banks and credit unions.
CDFIs work to revitalize communities that have fallen into a state of disrepair, and they are most commonly found in older urban areas.
Today, there are more than 1,000 CDFIs certified by the Treasury that lend all over the U.S.
Interest rates and fees for a CDFI loan are much more competitive than those of a private or hard money loan.
Seller financing is certainly an option, but transferring real estate requires much more than signing a sales contract and creating a note.
Consider whether there are any outstanding liens on the property. Is the seller delinquent on property taxes? Are there any judgments against the seller?
A title insurance policy should be bought to protect buyers and sellers from title issues.
Private lenders, hard money lenders and CDFIs all require title insurance and all perform a complete title search to make sure their money and property is protected.
The bottom line is this: If your clients can’t get approved for a home loan, you can present them with many other options.
Guide your clients to the financing option that works best for them.
Jeffrey Lawrence Kirsch is a mortgage expert from the Ft. Lauderdale, Florida. He specializes in non-performing loans and distressed mortgages as well as social impact investing. Jeffrey Kirsch writes about commercial and residential real estate in the US.