Reduce the Risk of Rejection

Rejection hurts.

But the pain is magnified when rejection is unexpected or proves costly.

According to a recent survey by the National Association of Realtors, 15 percent of buyers are being rejected for a mortgage after they’ve submitted a purchase contract on a particular home.

That means they have paid good money to formally apply for a loan, which typically involves a fee of several hundred dollars for an appraisal on the home the borrower wants to purchase.

Sometimes, rejection even happens at the eleventh hour, upending moving plans. “I have seen [lending firms] decide not to wire the money when everyone is sitting at the closing table,” observes Paul Logan, president of the Pennsylvania Association of Mortgage Brokers.

To be sure, in this ultra-conservative, post-credit-collapse era, some home buyers do everything right, only to find out that a lender decides it would be wrong to give them a loan. Here, a look at ways to reduce the risk of a rejection blindsiding your homebuying plans:

Pre-approval is Conditional

While to a layman’s ear the terms “qualified” and “conventional” both convey eligibility, in the mortgage-lending business there’s a stark difference: When someone is “pre-qualified,” it means that chances are pretty good they can get a loan of a certain size, but when they’re “pre-approved” it looks more certain.

When a real estate is working with a buyer, the agent should make sure the buyer has a reliable pre-approval for a certain loan amount so that they know to look at homes in a particular price range, asserts John Sullivan, past president of the National Association of Exclusive Buyers Agents.

Although most lenders will pre-approve a customer for free, they should give the process scrutiny, running customers information through an underwriting program and probably verifying data by asking for pay stubs and other documents, adds Neil Caron, vice president of Freedom Mortgage in Mount Laurel, N.J.

Still, a pre-approval is a snapshot of the borrower as he embarks on home shopping. Sometimes, borrowers trip up their chances for a loan by making changes in their financial life, by adding big charges to their credit cards, for instance, or taking out another loan, such as for a new car.

Sugarcoating Can Go Sour

Borrowers want to look good to a lender, but polishing the facts so that the truth is fuzzy doesn’t benefit anyone.

Be precise about all the numbers, lenders advise. And, remember that an approval is really stronger when the lender does at least a cursory verification of your credit, income and other factors.

Knowing that borrowers are often sensitive about bearing their financial souls, Jack Guttentag, who runs the website www.mtgprofessor.com, has developed a free pre-qualification tool. “It’s designed to let you see where you stand,” he says. “And it will offer [links] that give information on remedying your weaknesses.”

Agents Should Spot Trouble

Financing also can fall through because of the property, not the borrower.

“Say, for instance, the appraisal finds there is chipped paint,” says David McIlvaine, a broker with Keller Williams in Ellicott City, Md.

“When a buyer is getting an FHA loan, or even some conventional loans, they won’t be approved until that’s fixed.” Experienced agents should spot such trouble before a borrower submits his formal loan application, McIlvaine says.

Will Sellers Share the Pain?

No matter how careful a buyer and his agent may be, rejection can still come unexpectedly.

So can buyers minimize the hurt of rejection by having sellers pick up the costs? “You can ask,” says Sullivan. “But I don’t think a good seller’s agent would advise [the seller] to agree to it.”

McIlvaine adds that he has rarely seen the request, “but buyers who’ve been rejected before may decide that it’s worth a try.”