In A Market Like This, How Do You Get A Home Loan Approved, Anyway?

As strict as mortgage underwriting has been lately, it may seem that there's a magic formula to getting approved. Truth is, there's not.

Getting approved for a mortgage is the same as it ever was, just with higher hurdles. Satisfy the Mortgage Income-Equity-Credit Triangle and everything else is cream cheese.

The Income-Equity-Credit Triangle is the basis for most mortgage approvals -- conforming, FHA, Jumbo and otherwise.  The more strength that an applicant shows across each of the three elements, the more likely that person is to get approved in underwriting.

The 3 corners of the mortgage approval triangle are:

• Income : The relative strength of monthly taxable income versus monthly household debt.  This is more commonly called debt-to-income, or DTI.
• Equity : The percentage of equity in a home. This is more commonly called loan-to-value, or LTV.
• Credit : The middle of the three credit scores, as reported by Experian, Equifax, and TransUnion.

Now, for every mortgage product on the market, applicants must meet or exceed a series of minimum requirements in order to gain an approval.  These requirements are more commonly called "guidelines" and they've been been dramatically toughened over the past 18 months.

This is one reason why getting approved for a mortgage has been challenging lately. Meeting the minimum requirements is like hitting a target with a bow-and-arrow and the smaller the bulls-eye, the harder it is to score.

Furthermore, the bulls-eye's size varies from loan program to loan program.

Whenever the 3 elements exceed minimum requirements -- as shown in the illustration at top -- the "Morgage Approved" bulls-eye is fully visible.  This tells us that the applicant's home loan is likely to be approved in underwriting.

Not every mortgage applicant will show three-category strength, though, and that's okay, too.

Weakness in one of the 3 areas can be compensated for if the applicant can show exceptional strength in the two other categories.  In essence, the applicant's strengths counter-balance his weakness, and a mortgage approval can be just as likely.

In the industry, it's called "compensating factors" and is illustrated by the graphic at right.

Although income levels are less than ideal, credit scores and home equity percentages are stronger-than-necessary, leaving the "Mortgage Approved" bulls-eye in full view.  This applicant's home loan is likely to be approved in underwriting.

Now for that same applicant, if credit scores and home equity percentages are not strong, the bulls-eye falls out of range.  With no compensating factors, on paper, the loan looks primed to default and it's going to be denied in underwriting.

This is illustrated at right.

And, unfortunately for homeowners, mortgage lenders are putting less faith in compensating factors these days than they used to.  It's another reason why mortgage approvals are tougher to come by.

In response to spiraling mortgage defaults, Fannie Mae, Freddie Mac and the FHA all drew lines in the sand with respect to certain minimum applicant requirements.

For example, debt-to-income levels have a "hard-stop" in the 40-percent range.  Anything above that triggers a turn-down.  This holds for everyone -- even the multi-millionaire with 20% loan-to-value.

Hard stops are a cause for consternation among both homeowners because, in some respects, it's like common sense is getting thrown out the window.  "Of course I can repay this mortgage," an applicant will say.  "Look at my bank accounts.  Look at my payment history.  Look at my equity.  I'm the perfect borrower!"

Sadly, underwriters don't care much for that.  A hard stop is a hard stop and the mortgage application will be turned down because the paper file fails to meet minimum mortgage guidelines.

So, in reviewing the mortgage approval process, nothing's really changed over the past few years.  Appraisals are under more scrutiny, income must absolutely be verified, and there's more steps from start-to-finish but the process itself is exactly the same.

The only thing that's different is the size of the bulls-eye.  It's been shrunk.  And trying to jam yourself into the smaller bulls-eye isn't always your best answer.  Oftentimes, there's a better-fitting product with rates just as low.

So, if you're having trouble getting a home loan through underwriting or want to talk about your qualifications, send me an email anytime and we can talk about what's possible for you.