Here are some great tips on how to avoid some of the many pitfalls that can arise during a home purchase. Some typical maximum key debt to income ratio guidelines to keep in mind are:
- 41% - Conventional with MI (may have first time home buyer restriction)
- 45% - Conventional without MI - 20%+ down - (up to 50% strong compensating factors and DU approval)
- 45% - FHA (up to 50-55% with strong compensating factors and DU approval)
- 45% - VA (up to 50-55% with strong compensating factors and DU approval)
- 45% - USDA
Individual loans may have stricter requirements than those listed above as each loan is evaluated on a variety of characteristics.
Here's a handy list of 10 things you can do to kill your chances of getting a loan today.
1. The house just needs too much work.
This applies to REO's, foreclosures, and short sales... sure they're good deal, but the financing can be rough. Any broken windows, bad appliances, leaking roof, water damage, obvious mold, health or safety issues, structural problems and of course any liens.
2. Low Appraisal
Appraisal used to be a "rubber stamp"... those days are long gone and best forgotten. Today, appraisers are trying hard to "prove up" your purchase price... and standards have become tougher (good!). If the appraiser can't, in good faith, shore up your purchase price... they're just not gonna. Re-negotiations (post appraisal) are becoming much more common.
3. Borrower has too much debt.
Back in the day, large debt/income ratios were given a "blind eye"... no more. 35-40% debt ratios are the top end... the guidelines have become very tight... and if your buyer does qualify... make sure they don't make any large purchases just prior to closing, as many lenders are pulling credit just before closing... and if something has changed.... weee doggies, lookout!
4. Buyer is self-employed.
Lenders today are looking for 2 years of tax returns for those who are self employed. And they look at you cross-eyed if your income is declining. Real income will not be used (such as a Waiter who doesn't report all his tips)... they're going to be based on the income shown on your tax return.
5. Borrower has just started being paid by commission only.
In an effort to save money, some companies have switched their long term employees to commission. Lenders will not count commissions unless they can show a history of at least 2 years.
6. Your tax return doesn't match your IRS transcript.
Oh, this is a fun one. Used to be that you submitted a printout of your tax return, and the lenders just "believed" you. Sometimes they would pull a copy of the return for their files, but only after closing. Today, they are pulling transcripts prior to closing, and if they don't match up.. .(in other words, you "doctored" your printout)... that's fraud, and the deal is off, the loan is dead. (And keep in mind that lying on a mortgage application is a federal offense, punishable by time in your local penitentiary!!)
7. You can't get PMI.
Again, PMI (Private Mortgage Insurance) used to be a "given"... no more. There are only two or three PMI companies nationwide, and they are picky, picky, picky. It is possible, today, to be approved for your loan, and yet denied PMI. Your credit needs to be good... you need to have low debt, and the better your down-payment, the happier they are.
8. The condominium has issues.
Lenders are looking closer and closer at condo budgets, reserves and their general financial health. They're concerned about any pending litigation, and upcoming special assessments. Lenders have recently been pushing condo boards to increase their Fidelity bond... enough to cover at least 3 months of residents not paying their assessments. And they're taking a hard look at any owners (other than the developer) who owns more than 10% of the units.
9. You haven't allowed enough time for your loan processing.
All of these tighter guidelines are causing long approval times. The loan papers are often only good for 90 days or so... and if you get to that deadline, and have to rework the papers, that could cause a delay. If you're purchasing a HUD property... a delay could cost you the property entirely. Allow plenty of time for short-sale approvals, and even for standard mortgages. Realtors need to be hands-on with the lender and loan officers.
10. You don't have all the necessary financial paperwork.
Lenders are looking for more documentation than ever. They want to see Bank Statements, verification of large deposits or gifts, earnest money and rent checks. They may ask for letters of explanation on credit inquiries, missed or late payments, income fluctuations. Make sure to have all your ducks in a row.
ALAN MAY, Realtor®
Specializing in Evanston Real Estate and North Shore Real Estate
Coldwell Banker Residential Real Estate, 2929 Central Street, Evanston, IL 60201
847.425.3779 Cell: 847.924.3313 Email: Almay@aol.com
Evanston Real Estate & North Shore Real Estate