What Are Your Options?
Everyone's financial
situation is unique. With that in mind, here are six different options for
making your homeownership dreams a reality.
1. Get a Cosigner
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 pay the bill. 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. In
the event that 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 enough to pay the
mortgage on time or can't afford the monthly payments, but if you have income
that a lender isn't willing to consider (such as self-employment income from a
new business that has been very successful) 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.
2. Wait
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.
3. Set Your Sights on a Less-Expensive Property
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.
4. Ask the Lender for an Exception
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.
5. Try a Different Lender
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.
Be careful to avoid
loan sharks, too. Remember, you don't want just any loan, you want a reasonable
loan. One major potential benefit of homeownership is the financial security it
can bring, but if you get a bad loan, that aspect of homeownership disappears.
In a worst-case scenario, a bad loan could result in your losing the home, as
it did for many who bought homes during the carefree lending days of the
housing bubble.
6. Team Up With Someone Else
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.
Conclusion
To go from rejected to
preapproved, it's important to know what lenders are looking for in an
applicant. 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.
