So, why are more loans being denied in 2010?
Prior to 2003, underwriters were required to dot the “i”s and cross their “t”s. Then all heck broke loose and about anyone who could fog a mirror, was able to get a mortgage.
Well, the pendulum has swung back the other way. Fannie, Freddie, FHA and even VA have issued more stringent rules and regulation updates in the last 24 months. The last big shake up like this was back in the early 80s, with the savings &; loan crisis!
So, what are the 6 top reasons why more loans are being denied? What can you do to help your clients? Even if they can’t qualify now, we can help you turn them into home buyers somewhere down the road!
1. Low Credit Scores – Even with a big down payment and good employment history, if the credit score is under a certain threshold, the loan will be denied. The average score for the US is 693. Lenders who offer FHA and VA are imposing minimum credit scores. Credit counseling is one of the ways to increase scores so they can become home buyers in the future.
2. Lack Of Down Payment – With savings rates at an all-time low, people are having a tough time coming up with cash. They have to have “skin in the game” and gift funds can only be used in addition to their own funds. I’ve been able to help clients set up a savings plan!
4. Increase in Debt—The decrease in income and the increase in debt go hand in hand. This affects the qualifying ratios. While there is very little anyone can do about income, reducing the debt is the ticket to getting more people qualified. There are systems available to help with debt reduction.
5. Self-Employment—With layoffs and companies going out of business, more people are going the self-employment route. Tax returns and reporting all income is critical when it comes to qualifying. While everyone should take advantage of the tax breaks available to them, I recommend that they meet with an accountant, on a regular basis, to make sure their paperwork is in order when it comes time to apply for a mortgage.
6. Back-Up Documentation - Lenders have learned not to believe what anyone says anymore—they want proof—and they want it from 3rd parties—like the IRS, the employer, etc. In addition, prior to closing, there is a good chance that the loan may be reviewed by the lender’s Quality Control person, to make sure the underwriter did not miss anything the first time around. I recommend that clients keep at least 6 months worth of paycheck stubs, bank statements and 3 year’s worth of tax returns.
I’m sure you know from experience that it’s getting harder and taking longer for even the simplest deals to get through the process. It’s a good idea to have a Back-Up Plan and a system to work with potential clients, turn them into home buyers, even if it’s 6 months down the road! Let us be your “back up plan”!
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