Are you having trouble getting approved for a mortgage? Ever since the housing bubble burst, lenders have been subjecting mortgage and refinance applicants to stricter and stricter criteria. Here are five reasons why people are finding it more difficult to get approved these days.

IN PICTURES: 5 Steps To Attaining A Mortgage

  1. Lender Paranoia
    Mortgage lenders naturally want to avoid their past mistakes, so it's not surprising that they would look more closely at applicants' financial situations. But changes in the secondary mortgage market have made them extra cautious.

    Greg Cook, a licensed California real estate broker and mortgage banker, says that it used to be easy for lenders to get their loans insured by the FHA or guaranteed by Fannie Mae. Only in the case of fraud would these organizations require lenders to repurchase a mortgage.

    "Now, if FHA feels the lender didn't follow guidelines, they can refuse to insure and the lender has to pony up the cash to replace the funds on their warehouse line," Cook says. "Multiple buybacks can bankrupt a small lender."

    With lenders facing greater responsibility for the loans they originate, they have no choice but to be extremely cautious in approving borrowers.

  2. Restrictions on Eligible Income
    Do you earn income from a second job? While this money might be significant to you, providing some real breathing room in your monthly budget and stability in your finances, lenders might not care.

    Orange County, Calif., realtor Wendy Hooper says, "Income from a second job is generally not allowed, unless it has been derived from the same source for 12 months or within the same exact field for 24 months without any more than a 30 day interruption. And it is usually not allowed at all if it is not documented on a W-2."

    Unfortunately, many people receive the income from their second job in cash. Even if you deposit the cash in your bank account and declare the extra income on your W-2, lenders may not be willing to consider this income.

    According to Cook, "Lenders are now requiring all bank deposits that are not direct deposit payroll be verified. In our previous life, if the borrower's income supported deposits... explanations weren't required. Because it's virtually impossible to verify cash deposits, loans are being denied."

  3. Tighter Income-Verification Standards
    Lenders nowadays will rigorously scrutinize any income that borrowers want to be considered in their ability to repay a loan. There are no stated-income or low-documentation loans anymore, which is bad news for self-employed borrowers. But they aren't the only ones having trouble. Lenders' fears about cash deposits mean that people who happen to work in an industry where being paid in cash is common, such as the restaurant business, might have trouble getting approved. (To learn more, see Self Employed? 5 Steps To Scoring A Mortgage.)

    Parents who are expecting should also proceed with caution, as a July 19 New York Times article pointed out.

    Amy Tierce, certified mortgage planning specialist with Fairway Independent Mortgage in Needham, Mass., says that lenders are cautious because "often, babies are born and parents have a change of heart about working full time or working at all."

    She says that borrowers on maternity leave will need to validate that they are on paid leave; borrowers not on paid leave can buy before the delivery while their income can be verified, buy when they are back at work, or try to qualify on one partner's income.

    Tierce, who has been in the mortgage business for 20 years, explains, "Guidelines such as the one cited in the Times piece have been on the books forever." But in the past, buyers had more options to get around this guideline.

  4. Greater Scrutiny of Credit Reports
    If you manage to get preapproved, don't let your guard down. If you take any action that affects your credit score or any item on your credit report, you'll have to explain it to your lender.

    Kevin C. Miller, the president and CEO of Dallas-based TexasLending.com, says, "Clients have to write letters for all inquiries on credit that may show up after they apply for a home loan and the loan will now wait to close until the client can prove they have taken on no new debt due to the inquiry."

    Borrowers who want their mortgage approval to stick shouldn't open any new accounts or miss any payments. They shouldn't make any large purchases or close any credit card accounts, either. Lenders must re-run borrowers' credit reports immediately before closing, and any changes since the time of application can create problems.

    According to Cook, if you have to use a credit card at all, even for a tank of gas, you should pay off that amount immediately.

    "Because credit scores are not static and many loan programs have minimum credit scores, a slight drop in scores, maybe due to activity, could result in an approval turning into a denial," he says.

  5. Uninformed and/or Inexperienced Lenders
    Gone are the days when anyone who could fog a mirror could get approved. So if you want a mortgage, don't pick just any old loan officer - find one with expertise.

    Tierce says, "The biggest issue for a consumer is to work with a good loan officer who really understands the realities of today's market, and who will know and prepare the borrower on what to expect... a good originator will ensure that there are no surprises that will kill a transaction."

    An easy way to get a sense of a loan officer's expertise is to ask them a few questions. Can they clearly articulate their responses, or do they seem to be talking in circles? Do their answers actually address your questions, or are they just talking? Are their explanations detailed or vague?

    Asking a trusted family member, friend, co-worker or real estate agent for a referral to a loan officer also remains a good way to find someone who knows what they're doing.

The Bottom Line
Lending standards are so much tighter these days that even seemingly qualified borrowers are having trouble getting approved as banks try to avoid repeating their past mistakes. If it happens to you, don't be surprised and don't take it personally. By working with an experienced lender, being patient, and perhaps making some changes to your financial situation, you can put yourself in a position to get approved. (For more tips, see 4 Tips To Attaining A Mortgage.)

Catch up on your financial news; read Water Cooler Finance: Who Is The Next Buffett?

Related Articles
  1. Credit & Loans

    Guidelines for FHA Reverse Mortgages

    FHA guidelines protect borrowers from major mistakes, prevent lenders from taking advantage of borrowers and encourage lenders to offer reverse mortgages.
  2. Home & Auto

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
  3. Credit & Loans

    Can Corporate Credit Cards Affect Your Credit?

    Corporate cards have a hidden downside. If the company fails to pay its bills, you could be liable for the amount and end up with a damaged credit rating.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares US Real Estate

    Learn about the iShares US Real Estate fund, which holds shares of equity and nonequity real estate investment trusts incorporated in the United States.
  5. Credit & Loans

    Your Credit Score: More Important Than You Know

    Credit scores affect key aspects of your personal and professional life. Knowing your score and managing your credit input can make a big difference.
  6. Credit & Loans

    Schedule Loan Repayments with Excel Formulas

    Calculate all the particulars of a loan using Excel, and set up a schedule of repayment for a mortgage or any other loan.
  7. Credit & Loans

    What Qualifies as a Nonperforming Asset?

    A nonperforming asset is a loan made by a financial institution to a borrower who has failed to make any scheduled payments for at least 90 days.
  8. Credit & Loans

    Fixing Your Credit Score: A Do It Yourself Guide

    Following these five steps can go a long way toward repairing a low score.
  9. Investing Basics

    Should You Increase Your Credit Card Limit?

    What if you took out a new credit card and the issuing company started you off with a fairly low credit limit that hasn't been raised after the first year. Should you ask for an increase? The ...
  10. Credit & Loans

    Avoiding Red Flags with Online Mortgage Lenders

    Using an online mortgage lender can be convenient, but how do you know you can trust one? Follow these tips to make sure the lender is legit.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Chattel Mortgage Non-Filing Insurance

    An insurance policy covering losses that result from a policyholder ...
  3. Jamming

    A scam perpetrated by bogus credit repair firms that involves ...
  4. Furnisher

    A company that provides information about a consumer, including ...
  5. Mixed File

    A credit bureau record that contains more than one consumer’s ...
  6. Re-Aging Debt

    Restarting the clock on a debt’s statute of limitations.
RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  3. What types of liens are seen as good and which are bad for my credit?

    Creditors that allow purchases to be made through financing often require property to be pledged against a credit account; ... Read Full Answer >>
  4. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  5. How was the American Dream impacted by the housing market collapse in 2008?

    The American Dream was seriously damaged by the housing market collapse in 2008. In many ways, the American Dream is a self-fulfilling ... Read Full Answer >>
  6. What is the best way to start to rebuild your credit after a bankruptcy?

    Bankruptcies can be devastating to your credit score. Even worse, a bankruptcy will be listed on your credit report for between ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!