LENDER: “We require a minimum 640 FICO score to extend a mortgage. And at 680, you’ll get a better interest rate.”
What they didn’t tell you, is that you could qualify for a conventional or FHA loan with even a 620 score. The declining lender either has an “overlay” (which means their conventional loan risk tolerance is less than other lenders), and/or they just don’t offer FHA loans.
There are many national, reputable wholesale lenders who will underwrite standard FHA mortgages at a 580 credit score – and will even accept a lower credit score if you have at least a 10% down payment.
But – What if you:
For nominal cost, a credit agency can run a sensitivity inquiry to quickly tell you which credit cards need to be paid down and by how much – before a credit bureau increases your score. Once you receive a statement from your creditor evidencing your pay-down, send it to the credit bureaus for a credit score adjustment (but this can easily take 30-60 days).
Alternatively, you could work with a reliable credit agency to expedite this process (usually no more than 5 business days). Under this “Rapid Rescore” process, you are notified once your improved scores are posted, and a new credit report could then be presented to your lender so that you can get on with your mortgage!
Here’s the Point: After paying down a credit card, there are “Rapid Re-Score” programs to arrange for the credit bureaus to adjust your credit score within 5 business days.
LENDER: “Because you live at your parents' place without a lease and without having a prior mortgage, we cannot offer you an acquisition loan.”
If the above statement was the lender’s sole reason for declining your mortgage, then it is in contravention of the General Guidelines for Analyzing Borrower Credit per the U.S. Department of Housing and Urban Development (HUD). According to HUD, the lack of credit history (or a borrower’s decision not to use credit) may not be used as the basis for rejecting a loan application.
However, if, for example, in addition to no housing history:
… then you are not likely to get a conventional or FHA loan!
POSSIBLE SOLUTION: You might still be able to get a mortgage approval if you can demonstrate that you have been consistently contributing to household expenses – thereby, in effect, helping with your parents’ mortgage. Although it is always better to make payments by check (to more easily track your contributions), even cash payments can be acceptable support – in the case where your withdrawals can be matched to deposits in your parents’ bank statements.
Other compensating factors include showing that you have a consistent pattern of payments for utilities, vehicles, or insurance.
Here’s the Point: If you do not have any recent rent or mortgage payment history, then you will need to be patient and creative to get a mortgage.
LENDER: “I’m sorry to say that your loan request has been declined. We just couldn’t get a green light from the software program we use.”
YOU: “So I was declined by a computer?”
LENDER: “Well, sort of. You had several factors working against you including your credit score, some late payments, and the fact that you wanted to minimize your down payment.”
The above exchange actually happens more than you would expect. The explanation, while not very helpful, is actually about the best you will get – because the workings of the algorithms used in this standard mortgage software are unknown to almost everyone in the industry, except those who designed it.
There are two programs used by lenders to qualify their borrowers for conventional or FHA financing: Desktop Underwriter (DU) or Loan Prospector (LP). DU is required by the Federal National Mortgage Association (FNMA or Fannie Mae), and LP is required by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). And, Fannie Mae and Freddie Mac, government-sponsored enterprises (GSE’s) founded by Congress, are the ultimate buyers of your mortgage. Without getting a green light from one of these programs, your loan may be declined.
Avoid these factors to maximize the probability of getting a DU “Approve/Eligible” or an LP “Accept” finding:
► Loan-to-Value ratio > 80%
► Debt-to-Income Ratio > 43%
► Low Down Payment & Cash Reserves
► New Credit Cards with Low Borrowing Capacity
► Credit Score < 640
► Late Payments/Collections
► Limited History of Mortgage/Rent Payments
► Several Credit Inquiries
Here’s the Point: Without an “Approve/Eligible Finding” from Fannie Mae, you aren’t likely to get a conventional or FHA mortgage – and you may need to call a portfolio or private lender.
Jamie Dimon, CEO of JP Morgan, once wrote in a memo to shareholders that: “…mortgages are offered as a benefit to customers, not because it's a sound investment for the bank." In a recent article by CNBC, one-third of consumers surveyed complained about how their mortgage was handled by banks – and two-thirds of the complaints related to how banks handled all loans in general.
The excitement you experience during your first real estate purchase quickly dwindles when your bank demonstrates their apathy.
There are so many ways for banks to make the mortgage experience much less frustrating, yet “quality service” and “follow-up” tend to be forgotten. For example:
The way some bankers handle mortgages for consumers is certainly not the way they would handle their own mortgage!
Here’s the Point: There are plenty of mortgage lenders who understand the importance of service – just make sure to pick the right one.
Your wife just fell in love with a beautiful house on Valentine’s Day.
“Honey I will love you forever!”
If your purchase requires a loan amount that exceeds the standard conforming loan limit ($484,350 per the Federal Housing Finance Agency), it will be considered a "jumbo loan", for which special rules may apply.
For example, if you prefer your down payment to be only 10%, your bank statements or retirement savings accounts may need to show additional liquidity in the amount of 12 months PITI (the projected monthly amount of your Principal, Interest, Taxes and Insurance).
And, you will need to address these questions:
Here’s the Point: Jumbo loan rules can be discouraging, but there is usually a way to make it work.
You just returned from a fantastic holiday at your family’s Florida vacation home. You have always loved the home, which is owned debt free by your Mother and her Brother (your Uncle). Now your Uncle might like to unload his interest. He wasn’t gripped by your suggestion of gifting his 50% interest to you, and so you need a mortgage to make this work.
Here are some lending options (be sure to consult with legal and tax professionals):
3. UNCLE LOAN (Fastest/Cheapest)
Here’s the Point: It is probably easier to avoid a third-party mortgage when buying a family member’s partial property interest.
You went under contract to purchase a property, and then started accumulating the supporting documents to obtain your mortgage.Well, guess what? Your steps should have been reversed! Here are some common excuses for those who figured getting a mortgage would be easy, but then discovered there would be some difficulties:
Here’s the Point:Have your credit score pulled before you start making offers – and make sure it is a tri-merge report from all three credit bureaus.
Have the revenues from your business been solid over the past two years? Great! Well that’s not good enough to get a mortgage. Here are two main reasons:
The Federal National Mortgage Association (Fannie Mae) publishes self-employment income guidelines for lenders. To qualify for a mortgage, your self-employed net income should be stable, predictable and “likely to continue”. While having guaranteed, contractual income is not a requirement, lenders carefully analyze the financial strength of your business, your sources of income, and the economic outlook for your industry.
Some suggestions to maximize loan approval probability:
Here’s the Point: Make sure you produce a solid Letter of Explanation (LOE) to your lender that will support the continuity of earnings from your business.
If you are financing the purchase of a condominium unit, you are going to need help from the homeowners’ association (HOA). A property management company is often hired to manage the affairs of the complex, but the HOA is ultimately responsible for many things – including:
Your lender will require a detailed project review whenever your down payment is less than 20%, or if your condo will be a rental property. This means the HOA will likely need to provide you with several documents (e.g., bylaws, financials, master insurance certificates) and complete a condo questionnaire to confirm that:
The questionnaire takes time to complete, and so the HOA may charge you a fee for doing so. But in the end, knowing everything about your purchase will protect you from unforeseen events – including special assessments for which you may be responsible right after your purchase.
In addition, the HOA’s insurance agent will need to provide you with written evidence that the condo master property and liability insurance also applies specifically to your unit being purchased.
Here’s the Point:
When you purchase or refinance a condo, there are several reasons why you will want the homeowners’ association on your side.
In 2015, the Consumer Finance Protection Bureau (CFPB) created “Know Before You Owe” mortgage disclosure rules. These were implemented to ensure that consumers would have easy-to-understand information before making what is usually their largest financial decision – namely, the purchase of their own primary residence.
There were a bunch of disclosures required by the CFPB – with changes introduced every year. The key disclosures are the Loan Estimate (which replaced the old Good Faith Estimate), and the Closing Disclosure (which replaced the old HUD-1 Settlement Statement). A lender or mortgage broker is required to issue you a Loan Estimate within three (3) business days to a prospective borrower who is “in application”.
Borrowers refinancing or purchasing a residential property are deemed to be “in application” when the following six items have been received:
This was a good rule, because consumers often never really knew what their loan costs and reserves would be until right before closing. Unscrupulous lenders and brokers had been “hooking” their borrowers – thereby making it difficult to change lenders right before funding.
Interestingly, these rules do not apply to commercial, reverse, mobile home or HELOC mortgages.
Here’s the Point:
Get a Loan Estimate as soon as possible when applying for a mortgage – so that you know what your costs are likely to be.