Preapproval denied: what to do next

Your right to an explanation

The Equal Credit Opportunity Act, through its Regulation B, sets the rules. Under 12 CFR 1002.9, a lender generally must tell you its decision within 30 days after receiving a completed application. If it denies you, the notice must be in writing and include:

• A statement of the action taken.
• The lender's name and address.
• A statement of your rights under the Act, which prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance income, or exercising rights under consumer credit law.
• The federal agency that oversees the lender.
• Either the specific reasons for the denial, or a notice that you can ask for them within 60 days, in which case the lender must provide them within 30 days.

Regulation B adds that vague reasons do not count. Saying you failed the lender's "internal standards" or did not reach a qualifying score is not enough. The reasons must be specific and point to the principal factors.

If your application was incomplete, the lender can instead send a written notice listing what it needs and setting a reasonable deadline.

Common reasons and what to do about them

Debt-to-income ratio too high. The CFPB defines the ratio as total monthly debt payments divided by gross monthly income. Fannie Mae's Selling Guide sets maximums for conventional loans, with manually underwritten loans capped lower than those run through its automated system. Fixes: pay off or pay down debts with small balances, choose a cheaper home, add a co-borrower with income, or look at a loan program with different limits.

Credit history or score. A low score, recent late payments, collections or a recent bankruptcy can each lead to a denial. Get your free reports at AnnualCreditReport.com and dispute any errors. If the information is accurate, the path is time and a clean payment record.

Insufficient or unverifiable income. Short job history, a recent move to commission or self-employment, or missing tax returns can all prevent a lender from counting income. Gather the documents the lender lists, or wait until you have the history it needs.

Not enough cash. If you cannot document enough for the down payment, closing costs and any required reserves, the lender cannot approve the loan. Large deposits you cannot source may be excluded. Paper trails, gift letters and a few more months of saving can solve this.

Property or appraisal problems. If the denial came after you had a contract, the home itself may be the issue: a low appraisal, a condo project that does not meet requirements, or condition problems. The fix may be renegotiating, repairing or choosing another property.

Another lender or wait?

Lenders follow investor and agency rules, but many add stricter standards of their own. If your denial cites something specific to that lender, such as a higher minimum score than the program requires, another lender may approve you. If the reason is a ratio or credit problem that any lender would see, applying elsewhere right away is likely to produce another denial and another credit check.

Ask the loan officer directly: "If I fix this, what would the result be?" Many will tell you what score, ratio or document would change the answer.

Building a plan

A HUD-approved housing counselor can review your notice, credit reports and budget with you at little or no cost and help you set a timeline. Write down each reason from the notice, the fix, and a target date. When you reapply, bring evidence that each item is resolved.

If you believe a denial was based on a prohibited factor, the notice names the federal agency you can contact.

The bottom line

A denial must come with specific reasons or instructions for getting them within 60 days. Use those reasons as your plan: fix ratios, credit, documentation or cash, and only try another lender when the issue is that lender's own rule. With the right fixes, your next application can be a much stronger one.