Rejections and Appeals
Purchasing Fannie Mae loans is a long and taxing process. The eligibility requirements for Fannie Mae home loans are strict and require a detailed review of every applicant’s financial history, personal information and income, among other documentation. The process can take several weeks, and approval is not guaranteed. Applicants must prove they are financially responsible and will be able to fully pay back the loan.
When applicants do not meet Fannie Mae loan requirements for eligibility, they receive a loan rejection. A rejection can be due to poor credit, insufficient assets, issues with the property itself or a series of other reasons. It is imperative that homebuyers know what can affect their loan application. From there, they can plan accordingly to ensure their application goes through without major issues. To learn more about what to do if your loan application is denied, review the sections below.
What are the top reasons for Fannie Mae loan rejection?
Fannie Mae loans have extensive eligibility requirements. Since the 2008 housing market crash, lenders are stricter with the eligibility requirements and what qualifies as acceptable documentation. One of the main reasons homebuyers may face a home loan application rejection is due to an unreliable financial history. Lenders look for responsible borrowers who have a long history of paying their loans and credit card bills on time. If you habitually default on payments, the lender will not feel confident in your ability to pay your monthly mortgage payments.
Your income is also an important element in Fannie Mae home loan requirements. In 2010, the Mortgage Reform and Anti-Predatory Lending Act made it mandatory for lenders to perform their due diligence and ensure that borrowers have sufficient income to afford a mortgage loan. Thus, lenders use a debt-to-income ratio to determine if the borrower is financially stable enough to take on another liability. Under Fannie Mae, that ratio must fall under a certain percentage to be eligible for a loan. In addition, borrowers need to list their assets, which are additional sources of potential income. If you have a low income and few assets, you should be prepared in case a lender rejects your loan application.
Note: Download our guide for details on financial requirements for Fannie Mae loans.
Another common reason why home loans are rejected is a change in your credit. When you first file for a loan application, lenders will perform an inquiry into your credit report. Your report contains information on your accounts, payment history and liabilities. If everything on your report is satisfactory, the lender will move on to another phase in the application process. Many applicants believe that is the end of it. However, once the process gets near the closing phase – when the home purchase is finalized – Fannie Mae lenders will perform a secondary inquiry. If your credit falls below the FNMA’s required FICO score, the lender will reject your application. Thus, it is critical that applicants avoid taking any actions that could negatively affect their current credit. This includes:
- Applying for one or several credit cards.
- Getting an auto loan.
- Closing a credit card account.
- Being late on a payment.
Home loan rejection reasons also include issues with the down payment. Many lenders require a 20 percent down payment to qualify for a home loan. However, with the average cost of homes around $200,000, this is not feasible for everyone. Therefore, many lenders allow homebuyers to put down a lower down payment with additional costs attached. Typically, the lender will require private mortgage insurance and offer a higher interest rate. However, if an applicant can only put down a very small down payment, this can lead to a rejection.
Note: You can use a mortgage calculator to get a sense of what your monthly payments would be with different down payment amounts. Ultimately, you want to make sure that you can afford to pay your mortgage, and tapping too heavily into your savings may make you nervous. However, keep in mind that the more money you put down when buying a home, the lower your monthly payments will be.
According to the Fannie Mae home loans guidelines, the lower the down payment, the more likely a lender will be to reject your application. Moreover, the applicant should pay for the Fannie Mae down payment independently. Purchasing a loan for a down payment on a home is a red flag for many Fannie Mae lenders. It demonstrates that the applicant does not have sufficient funds to contribute to a relatively small portion of the home’s overall cost. This, combined with an inconsistent financial record, can cause a loan application rejection.
For information on how the property appraisal and your tax returns may be the reason for your loan rejection, download our guide.
What should you do if your lender rejects your loan application?
After facing a loan rejection from Fannie Mae lenders, you may feel discouraged during the home-buying process. However, there are steps you can take and issues you can work on to improve your application and make yourself more attractive to lenders. By law, lenders must notify you of the reasons for your loan rejection. From there, you can focus on the areas that require your attention.
One of most common reasons for a home loan application rejection is poor credit. Working on your credit essentially means building a consistent and stable financial history. A good credit score is one of the key Fannie Mae loan requirements. It displays your past financial behaviors and serves as a strong indication of your future habits. If you have a low credit score, there are several ways to build it back up, including:
- Consistently making timely payments.
- Keeping your credit utilization at or below 30 percent.
- Not opening too many credit accounts at once.
- Checking your reports annually.
Building credit can take a long time, regardless of where you start out. However, with the proper strategy, you can build your credit and increase the likelihood of a Fannie Mae loan approval. Moreover, if your loan was rejected due to the property’s low value, you have two options: look for a more suitable home or submit a rebuttal request. Throughout the appraisal rebuttal process, homebuyers can dispute the appraisal by looking at the report and seeing if any important information is missing. You can also compare the property to similar homes in the area to determine if the appraisal is far from where it should be.
What is Fannie Mae?
The Federal National Mortgage Association (Fannie Mae) provides affordable housing finance options for homebuyers and renters. Fannie Mae does not provide original mortgages. Rather, the organization purchases existing mortgages and guarantees them with government sponsorship. Fannie Mae mortgages have a fixed rate and can have a lifespan as long as 30 years.
Who is eligible for Fannie Mae?
Fannie Mae guarantees multi-family and single-family mortgages and loans. To qualify for either type of loan, an applicant must have an income lower than the local average, and the property he or she wants to buy must be worth less than the federal maximum. Further, applicants must have a credit score above 620. However, the minimum required credit score may change depending on how many properties the applicant plans to purchase.