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.