Getting home loans are very tough these days rather than what it was a few years back. When credit crunch happened, banks made their credit benchmarks really stiff. Lenders today accept only 55% of the mortgage applications duly submitted, Mortgage Bankers Association (MBA) reports.
The FDIC data says, the U.S. banks experienced an all-time low of 7.4% in 2009. This is the sharpest fall since 1942 and the banks haven’t thought of easing the lending standards. So, families thinking of refinancing their current homes or taking loans to buy a house should collect all the information that will ensure positive response from the lenders.
3 reasons out of many for people get turned down while asking for mortgage and how to get over these obstacles:
- Improper documentation of income
Most people think documenting their income is pretty simple. That’s where they are mistaken. Even the ones with high FICO scores might not qualify from a mortgage bank lending business. Even if you have scored some 700 points in FICO and carry a huge amount of cash on in your bank, you would need to prove your income to qualify for the mortgage.
Other attributes related to income that can hinder your mortgage loan application are: changing jobs frequently, employment gaps, not working continuously for two or more years, or shifting from salary based work to work on commission. In short, if your document history cannot be properly tracked, mortgage bank lending will become a difficult possibility.
Both credit scores and cash reserves matter in case of loan sanctions. However, the present scenario has banks and private lending enterprises carefully looking into all the factors- the amount asked for lending by the applicant, loan-to-value ratio for the loan asked, what your debt to equity values are, and if your tax returns shows if you can manage the taxes in case situation gets adverse.
- Strong compensation factors missing
In case you find some problem with your application or you might be on the borderline of qualifying as your debt ratio is high, you could make your application strong with compensating factors. Compensating factor is one lingo of the mortgage industry. This shows the positive aspects that your mortgage application has to side-line other negativities.
The compensating factors can include:
- More than 20% of down payment
- Less than 80% of loan-to-value ratio
- Having cash reserves in huge amounts for 12 months and more
- Credit score above 740
If borrowers come with improper applications (not polished), if they cannot substantiate with a strong compensating factor will mean turning down the mortgage loan request.
- Picking wrong type of property
There are certain properties in mortgage lending most lenders are scared to finance. Two of them are investment properties and second homes. This, of course, does not mean funding is not possible for these properties. The only factor is carrying stringent terms and conditions like higher amount of down payments in cash and have higher cash reserves.
Buying condominiums, especially in newly developed localities could be tricky. The buyer might assume getting a good bargain by taking a condo that is under construction. The warning is: most of the lenders, whether it’s banks or private lenders won’t sanction loan until more than 70% of these condos have been sold. To add to the misery, lenders do not approve loans to condos that do not have FHA approval.
There are many other reasons why mortgage bank lenders turn down most mortgage applications. However, if you have taken care about the above 3, you have at least started to find some ways to make your loan plans successful.
Preethi vagadia is a business architect worked in Mortgage and Finance software department with top notch companies and has over 8 years of experience in Mortgage Lending Technology,Mortgage Loan Servicing Software, mortgage management software, mortgage loan software etc. She has also worked in several process improvement projects involving multi-national teams for global customers in warranty management and mortgage.