At FHA Loan Search, we have touched on what happens following the good news that your FHA loan application is approved! So what happens when your home loan application has been denied? As with approval notices, FHA loan denials have a clear set of rules that require a lender to inform the applicant of both the decision and details as to why their loan application was denied.
Rules a Lender Must Live By If You’re Not Approved
According to Section A of HUD’s 4155.1 when a borrower is rejected for credit reasons, the Fair Credit Reporting Act requires that the borrower be notified and provided with the contact information of the specific credit reporting agency that may reflect a bad credit item. This may allow a borrower to either verify and accept the credit report item as valid or to consider disputing the item.
As for the lender, HUD 4155.1 states the following:
“When a loan is rejected, the lender must immediately complete a rejection notice consistent with the requirements of Regulation B and, when required, an Equal Credit Opportunity Act (ECOA) notice, forwarded to the borrower.”
The reason for the rejection has to be specific and at least “one credit aspect” must be made clear as the reason for rejection.
Straight from HUD, they state that the…
“rejection notice must provide specific reasons for the rejection. Delinquent credit accounts need not be listed. The rejection notice must contain all the reasons for denial/ineligibility and any counter proposals to effectuate loan approval, such as reduced mortgage amount.”
Loan Rejection Is Not Always Due to Finances
Generally speaking, there are 7 reasons that may result in a denial and they don’t all necessarily have to do with your financial ability to handle a mortgage payment. Some of the things that are in your control include:
Sometimes, per FHA guidelines, it’s possible that the property just doesn’t qualify and it may have nothing to do with your financial standing or capacity. FHA loans are not for investment properties, second homes, and they have certain rules that lenders must confirm before grating approval.
These things typically have to do with the property condition or the dollar amount that it is appraised at. If things don’t line up in one way, or if there are a combination of issues, that may result in the overall rejection.