You know your credit is top-notch, your money owed is small and you can easily afford that Edmond home you've been eyeing. Well at least you think all this is true. Wham - you are rejected for the home loan.
You are left scratching your head and wondering what the heck is going on.
Well, mortgage laws have tightened and mortgage lenders are more reluctant to write the loans. It's getting harder for those homebuyers. Loans are rejected, sometimes for no good reason.
Here's the issue: Government-backed Fannie Mae and Freddie Mac have tighter standards. Most believe that's a good thing.
However, most home mortgages have typically been backed by Freddie and Fannie. This makes banks and lenders skittish if there is no loan guarantee. If the loans aren't backed, this makes it more difficult to get help on default loans.
Freddie and Fannie, in 2009, raised the minimum credit score from 580 to 620 for borrowers. That's a good thing. But they've pushed through a multitude of other requirements as well, that resulted in real estate transactions not getting done. Even for somewhat low-risk borrowers. Just one Fannie or Freddie guideline not met or broken will get you rejected.
The Federal Reserve notes that one-fourth of loan applications get denied for mortgage loans. According to the National Association of Home Builders (NAHB) there are thousands of potential buyers that just don't try for a loan.
"The pendulum has swung too far in the other direction," NAHB President Jerry Howard said. "This overreaction is retarding the housing market recovery."
Some reasons that banks must turn down mortgage loans:
- Debt too high - increase on income-to-debt ratio. If debt payments exceed 45% of income, no loan will be approved. This 45% hurts qualified buyers. For example, couples wanting to purchase vacation homes or small business owners coming off a few bad years.
- Foreclosure Wait - extended to 7 years. Though borrowers faithfully and carefully rebuilt their finances, have steady employment, sufficient assets and excellent income, lenders may not finance mortgages for 7 years.
- Missed Credit Card Payments - One missed payment hits your debt-to-income ratio. The missed payment adds 5% of the outstanding loan balance to the calculation. For example: $1,000 on a $20,000 student loan balance.
- Condo Sales - Under the Fannie or Freddie lenders, 70% of the units have to be sold in the condo association before a loan can be approved.
Is there any place to go?
Portfolio lenders look at the full credit history, see a blemish and say it doesn't have any impact on the overall worthiness of the credit. These lenders offer competitive terms and rates; but loans will be more costly if there are any credit problems.
They may offer rates and terms competitive with agency loans, but if there are serious risks associated with the buyer, loan costs will get higher. Mortgage brokers relay that it's a tough environment, with some pricey mortgages, particularly for self-employed people.
What Can You Do?
Make sure your credit will pass the muster of the lending institutions. If it doesn't pass, understand the reasons and correct them, even though it may take a little time. Ask if there is any range of loan that you might be eligible to get. In the meantime, save your dollars, keep your current home in tip-top condition, and be patient.
If I can help you with buying your home and finding a house inspector in Blanchard, Edmond, Shawnee, or Oklahoma City, please contact me online, give me a call at 405-366-1111 or check out my website.
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