What to Do if You Are Denied a Mortgage

Blacks and Hispanics are denied home loans at nearly twice the rate as whites. Here’s how to get negative decisions reversed, or find a loan elsewhere.

Earlier this year, the Department of Justice sued City National Bank in Los Angeles for an alleged pattern of unlawful redlining, which the DOJ defined as “when lenders deny or discourage applications or avoid providing loans and other credit services in neighborhoods based on the race, color, or national origin of the residents of those neighborhoods.” The DOJ alleged that during a roughly four-year span, City National Bank provided mortgage loans almost exclusively to customers in majority-white census tracts, even though in most of the communities in Los Angeles at least half of the residents are Black and Latino.”

By way of comparison, the DOJ said competitor banks in the same area gave out six times as many mortgages to Black and Latino customers over the same four years.

While you might think that redlining—the discriminatory practice of denying financial services like mortgage loans to someone based on the location and ethnic or racial makeup of their neighborhood—is a thing of the past, the case suggests it’s still happening. (Watch BAD INPUT: Mortgage Lending, below, for more on how discriminatory practices in mortgage lending persist today.)

And alarmingly, City National Bank isn’t the only bank caught doing it.

In the last two years, the DOJ sued four other banks across the country over the practice, settling for a total of $73 million. The lawsuits are part of a DOJ initiative that began in October 2021 to combat redlining across the U.S.

“In the words of Dr. Martin Luther King Jr., the issue of fair housing is a moral issue,” said Martin Estrada, U.S. Attorney for the Central District of California when the settlement with National City Bank was announced. “Ending redlining is a critical step to closing the widening gaps in homeownership and wealth.”

City National Bank, which agreed to settle the DOJ’s lawsuit for a record $31 million—the highest ever settlement in a redlining lawsuit to date—said in a statement that “we disagree with the allegations, but nonetheless support the DOJ in its efforts to ensure equal access to credit for all consumers, regardless of race.”

Persistent Racial Inequity in Mortgage Lending

Redlining is not the only reason there is a shockingly large racial disparity when it comes to home ownership. In 2019, there was a 30-percentage point gap between Black and white homeownership levels, according to a recent study from Urban Institute, a social policy research organization—larger than it was in 1960. But other explanations are also rooted in historically discriminatory practices.

“Homeownership is the biggest source of wealth for most families, and families that built that wealth over the last few decades did so on policies that deliberately discriminated against Black and Latino consumers,” says Chi Chi Wu, an expert on consumer credit and lending and senior attorney at the National Consumer Law Center. She points to the exclusion of Black and Latinos from the GI Bill after WWII. “That’s how a lot of white consumers built their wealth.”

In addition, the credit scoring system lenders use to determine eligibility for a loan also disadvantages people in marginalized communities, who tend to have lower scores compared with white borrowers. (A too-low credit score is one of the two most common reasons for being denied a mortgage loan. A high debt-to-income ratio is the second one.) 

That these groups have lower scores is at least partly due to the way scores are calculated. The current scoring models favor certain kinds of on-time payments, like those for credit cards, over others, like payments for rent and utilities.  

“To end systemic racism in the mortgage lending system will take a coordinated effort to overhaul the credit scoring system and loan application process,” says Delicia Hand, director of financial fairness at Consumer Reports. “There is no inherent difference between a consumer’s ability to make a credit card versus, say, a rent or utility payment. But the lack of inclusion of these data into a credit score has excluded people for loans who might otherwise qualify.” 

Fortunately, efforts to change this are underway. The Federal Housing Finance Agency (FHFA) announced last fall that once finalized, a new rule will require lenders of federally backed mortgages to use new types of credit scores—called FICO 10T and VantageScore 4.0—that will, among other things, take a person’s rent and utility payments into consideration. 

The new scoring models are intended to be more inclusive, says FICO, and will replace older FICO credit scores (also known as FICO “Classic” scores) used for the last two decades.

In the meantime, anyone who’s applied for a mortgage but was denied should know that all is not lost, says Mike Calhoun, president of the Center for Responsible Lending, a nonprofit research and policy group. “Shop around,” he says, because “this is one of the most consequential financial decisions you can make.” And, you stand to potentially get a better deal, Calhoun says. 

Here are some steps to take if you were denied a mortgage and want to either salvage your loan or look for alternatives.

How to Save on Your Loan Application

If your application for a mortgage was denied and you want to save it, time is of the essence. 

That’s because you’ll have as little as a day or two between the time your loan officer lets you know of the denial and when the bank’s formal denial letter is issued to try to salvage the loan, if you choose to try to do that. 

Ask for an Explanation of Your Denial

By law, lenders are required to provide a detailed explanation about why your application was denied. In fact, the Consumer Financial Protection Bureau underscored this last year when it reminded all lenders of this obligation—even those lenders who say they use complex algorithms to determine loan qualifications that are not easily explained. If you don’t receive an explanation, press your loan officer for one. And if that doesn’t work, ask for their manager or the branch manager for more details. 

“You have a legal right to understand what it is about your financial situation that caused you to be denied,” says CR’s Hand. 

Provide Additional Documentation

Incomplete or unverifiable information is another primary reason for mortgage loan denials, according to a 2020 analysis from the National Community Reinvestment Coalition, a national organization of community groups. Besides paystubs, tax returns, and W-2 income statements from your employer, lenders may look for verification of where your down payment is coming from, for example. Is it a gift from a family member, or a withdrawal from a retirement account? Providing a letter explaining the source, or anything else that the lender may not be clear about, such as reasons for gaps in employment along with supporting documentation, could salvage your loan application.

Ask if You Might Qualify for a Smaller Loan

Although that might mean you’d need a larger down payment, a loan for less money could improve what’s known as your debt-to-income ratio, which the lender is looking to have come out at upward of 50 percent or so, says Alex Kellam, loan officer at Southern Trust Mortgage in Virginia Beach, Va.

Ask if a Cosigner Would Help

Understandably, not everyone has a parent or relative who is willing to cosign a 30-year mortgage. But if you have a relative willing to make that commitment, it could make the difference between getting the mortgage or not. Kellam says it is common among his bank’s clients for there to be cosigners. In a year or two, if you are in a better position to qualify for a loan on your own, you could refinance and possibly get a better loan deal, without the need for a cosigner.

Ask if the Appraisal Was Too Low

If the price you agreed to pay for the property is higher than the bank’s appraisal of it, the bank would look to you to make up the difference. 

So for example, if you agreed to buy the home for $500,000, but the bank’s appraiser said the home is only worth $425,000, the bank will likely be unwilling to lend you that additional $75,000. 

While this situation is not technically a mortgage denial, it leaves you with two options. One is to ask the bank to reconsider its appraisal, Kellam says. “In some cases, the listing agent and your realtor can provide prices of similar properties to compare so that the lender and their appraiser can review it and have a reconsideration of value.”

Another option is to either ask the seller to lower their price to the appraised value, or find funds on your own to make up the difference. Understandably, if your available funds are already stretched thin, you might not have enough to make the bank feel comfortable giving you a loan.

Shop Around for a New Mortgage

Time also matters if you decide to try to shop for a new loan instead. You have 14 days, starting with the first day the original lender did a “hard check” of your credit score, to shop around for a new mortgage without further hurting your credit score. That’s because each hard check from a potential lender will cost your score several points, but all hard checks done for the same purpose and within 14 days count only once.

Consider a Lender That Participates in a “Special Purpose Credit Program”

Although these programs have been available since 1974, they remain lesser-known mechanisms to help Americans gain access to mortgages. Nearly any lender can apply for an SPCP, which allows them to specifically assist disadvantaged borrowers of color, women, people with disabilities, and other underserved groups. The CFPB recently championed SPCPs to help increase the number of homeowners and to help close the racial homeownership gap. 

The National Fair Housing Alliance recently partnered with the Mortgage Bankers Association, an industry group, to expand the number of lenders that offer SPCP loans. That program is an “excellent tool for expanding credit access for underserved markets,” said Lisa Rice, president of the NFHA, in a statement announcing that partnership. 

Larger traditional banks in particular may have limited, special SPCP programs, says Jonathan Wilson, vice president of mortgages from Liberty Bank, one of the largest Black-owned banks in the U.S. with branches throughout the South and Midwest. For example, Bank of America announced last August that it would offer no-down-payment and no-closing costs mortgages in some areas, including certain Black and Latino neighborhoods in Charlotte, Dallas, Detroit, Los Angeles, and Miami, through a new SPCP program, the Community Affordable Loan Solution. 

Citibank announced a similar SPCP through its HomeRun program that helps greater numbers of Blacks and Hispanics qualify for mortgages by requiring low downpayments and removing the need to buy mortgage insurance. Citibank said the program would be available even in areas where the company doesn’t have any branches.

To find a bank offering an SPCP near you by, go to the NFHA’s website  or call 202-898-1661.

Consider a Community Development Financial Institution

CDFI is a special designation awarded by the Department of the Treasury to banks and credit unions that have a stated mission of making banking services, including mortgages, more available to underserved populations and communities. 

As part of that, CDFI lenders can offer loan rates and terms that are more flexible than traditional lenders, says Calhoun of the Center for Responsible Lending, as well as provide downpayment assistance, or even help to bulk up a rainy-day fund in case you hit a rough patch with your monthly mortgage payment.

“We want to help people buy the house,” says Wilson at Liberty Bank, itself a CDFI. “We live in the communities we serve and these are not just numbers to us. These are people that we see at church and who we run into in the grocery store.” 

The first step is to call around to your local credit unions and small banks and ask if they’re a CDFI and about what kind of loans they offer, says Calhoun. You can also look up CDFIs by ZIP code.

Ask if the Bank Will Consider a “Portfolio” Loan

This refers to a bank opting to keep the loan in house rather than selling it to an investor. While less common, it can be an effective way to get a mortgage, if, for example, you have an unusual situation such as you’ve been self-employed for less than two years, or have a single item on your credit report that is pulling the whole thing down. By keeping the loan in their portfolio, the lender has greater control over who they accept or deny. 

“With a portfolio loan, your application doesn’t have to fit into a traditional ‘box’,” Wilson says.

One recent example, he says, involved a couple who’d cosigned on a loan for their adult child, who then unexpectedly passed away. Payments were missed, hurting the couple’s credit score. So when the couple applied for a mortgage for themselves, Wilson says Liberty Bank was able to assess their total financial situation, consider their unique circumstances, and give the couple a mortgage anyway. “If you’ve been close enough to anyone who’s passed, you know that their bills and things can get missed, and the current model doesn’t consider that,” Wilson says.

Consider a Private Lender

This could be an individual, such as a family member, or a business, the owner of the property you are trying to buy, or a contractor. It could also be a nonbank mortgage lender, which are companies that are not banks or credit unions but offer home loans.  

Getting a loan from such a lender could have  drawbacks: It might mean your loan won’t be federally protected as other mortgages are in situations involving bankruptcy, foreclosure, and forbearance (the allowance of delayed payments, say, during a public health crisis such as Covid-19). 

But because private loans typically have fewer federal rules to follow, lenders have much greater flexibility with loan requirements. A lender may, for example, accept a lower credit score when a buyer makes a larger down payment, for example, or accepts a higher interest rate. So they can be a good option if you’ve got a slight hitch in your application, say, or a low credit score or a high debt-to-income ratio. 

In addition, private lenders can already use the FICO 10T score, FICO says, without having to wait until 2025 before it will be used for all federally backed loans. Asking a private lender to run this score, versus your FICO classic, could help you secure better loan terms.

File a Complaint if You Think You Are a Victim of Redlining or Financial Discrimination

There are several places you can file a complaint:
• DOJ’s housing discrimination tip line at 833-591-0291 or submit a report online.
• CFPB at 855-411-2372 or submit online.
• Housing and Urban Development at 800-669-9777 or submit online.

Correction: This article was updated to more accurately reflect the allegations in the Department of Justice’s complaint against City National Bank, and to clarify that outcome of the suit.

To read the full article, click here.