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 harder to get approved these days.
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.
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."
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. Parents who are expecting should also proceed with caution, as a New York Times article pointed out.
Amy Tierce, certified mortgage planning specialist with Wintrust Mortgage 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.
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.
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.