Denial of credit: the ultimate (or penultimate) step of the loan application process
A buyer’s agent is duty bound to assist his buyer navigate the intricacies of the loan application process. Mortgage financing is integral to nearly all purchases by homebuyers. Without purchase-assist financing, most prospective homebuyers would be unable to purchase the home of their choosing. This is especially true for vulnerable, first-time buyers who do not have the proceeds from the sale of another home for a down payment on a property.
Thus, the outward conduct, psychological motivations and internal processing of the chosen lender must be known by the buyer’s agent to best assist his buyer. And on a purely practical level, if the buyer is unable obtain financing to purchase a home, the agent is prevented from receiving a fee. Thus, it is a loss for both when the buyer’s loan application is denied by the lender.
Denial is an unpleasant occurrence but it doesn’t end the agent’s obligation to the buyer. The agent must be able to knowledgeably advise his buyer about the loan application techniques in both good times and in bad. Further, it is possible that the agent’s counsel is most appreciated when things go awry, such as when a lender denies a loan application and the buyer wants to know what actions can be taken.
If adverse action is taken by a lender on a buyer’s application for a purchase-assist loan (such as denying the buyer a loan or offering a loan on different terms from the application), the lender will hand the buyer a denial of credit form. [See first tuesday Form 219 accompanying this article]
In the denial of credit, the lender will provide the buyer:
- written notice of the adverse action taken;
- a statement that the lender’s decision to take adverse action was based in whole or in part on a credit report, including the name, address, and phone number of the credit reporting agency which issued the report; and
- a notice detailing the buyer’s right to:
- obtain a free copy of his credit report from any national credit reporting agency within 60 days; and
- dispute the accuracy or completeness of any info in the credit report. [Calif. Civil Code §1785.20; see Form 219]
The lender will also indicate the specific reason(s) the adverse action was taken, such as:
- the buyer’s delinquent payment of debts;
- inadequate references provided by the buyer to establish credit;
- derogatory trade references exist; or
- the failure of the buyer’s references to respond to the lender’s verification requests. [See Form 219 §3]
Once the denial of credit has been handed to the buyer, the agent can advise the buyer to respond in one of two ways:
- continue to seek financing from the same lender which gave the denial of credit; or
- seek financing from another lender.
If the buyer chooses to pursue financing from the same lender, he may submit a written request for the reason his credit was denied within 60 days after receiving denial of credit. [Calif. Civil Code §1787]
On the initial receipt of a denial of credit notice, the agent needs to review the notice and the buyer’s credit report to identify the derogatory credit issues. With the guidance of the agent, the buyer may need to prepare and submit a Derogatory Credit Explanation Letter to the lender. The Derogatory Credit Explanation Letter is designed to provide a personalized explanation for each derogatory item appearing on the credit report. The explanations establish the external historical context surrounding the rise and resolution of the derogatory items not shown on the credit report. [See first tuesday Form 217-1]
May 2012 Form of the Month; Derogatory Credit Explanation Letter
If the lender still elects not to extend financing to the buyer, the buyer has no other option but to seek a loan through another lender if he is to pursue the purchase. The discouraging event of a denial does not end the agent’s duty to the buyer. If the buyer still wants to own a home, the agent needs to guide the buyer to other avenues of financing, such as a credit union, community bank or a lender of a different size or demographic constituency from the lender denying the loan.
Even after the dreaded denial of credit kills the loan, the experienced and thoughtful agent will not let it kill the deal – or his buyer’s dreams of homeownership.
Editor’s note – Current first tuesday students and purchasers of first tuesday Forms-on-CD 4.3 may download a FREE copy of the Denial of Credit. Log in to your student homepage at www.firsttuesday.us using your eight-digit Department of Real Estate (DRE) license number or T-number and click, “first tuesday Forms Downloads and Updates.”