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No Way I Will Be Declined

declined

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:

  • “XYZ Credit Co. said my FICO score was 665, which I knew would be good enough for me to qualify for a mortgage. Plus I could always add my spouse, who has an even higher score than me.” Unless you use https://annualcreditreport.com, or have a licensed mortgage broker or lender pull your tri-merge credit report, 90% of the time the score you receive from your source is likely to be 10-50 points higher than your true score. This could be enough to disqualify you from getting a mortgage. Also, the lender will use the lower score of the two – so your spouse can only help if you need to show additional income.
  • “I had a mortgage before, and I have never had trouble qualifying for a credit card or an auto loan.”Most lenders require that you have at least three (3) separate tradelines, one of which should have been in place for as many as 12 months – with an authorized amount of $1,000 or more. You also need to be the primary card holder, not just an “Authorized User”. And, if your prior mortgage has been repaid, that doesn’t count towards the minimum tradeline requirement.

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.

Condo Loan Craziness

Just because you have good credit, low debt-to-income ratios and a good size down payment, don’t think that qualifying for a purchase mortgage on a condominium will be a breeze. It may not be you that the Federal National Mortgage Association (FNMA) is concerned about. Since FNMA is the likely buyer of the mortgage advanced by your lender, they are fastidious about how the condo homeowners association (HOA) or property management company is managing the affairs of the building.

There are some rules you should know before making an offer:

  • If you intend the condo to be an investment property, over 50% of the units in the building must be owner-occupied.
    WHY? Owner Occupants look after their units and are less apt to default on their mortgages
  • If the building offers in-room housekeeping and concierge services, FNMA will assume the condo is operated as a hotel and your loan will be declined.
    WHY? Short-term rentals (daily/weekly/monthly) are prohibited – whether offered by the HOA or the unit owners (and if the latter, the HOA will need to police this use)

It is not easy for the HOA to monitor the number of rental units – in which case the appraiser will need to make what is often an unreliable estimate. If this estimate is high, it triggers a red flag in the eyes of the lender. Letters of explanation and verbal confirmations will be required, thereby causing substantial delays and increasing the odds that your loan may not close.

Here’s the Point: Need a loan to buy a condo unit? If the building offers short-term rentals, chances are you won’t get your loan.

 

Free Money at the Closing Table

Free?  I think not!  But there are definitely “lender credits” available to you, depending on the interest rate you select.  The technical term for this credit is “yield spread premium”.  But is the lender passing this credit on to you, or are they keeping it – and therefore booking additional profit from your loan?  This profit would be in addition to their processing fee, and results from the earnings spread they generate between what you pay them versus what it costs them to fund your loan.

The higher the interest rate you pay, the higher the credit to which you should be entitled – all of which can be applied towards offsetting your closing costs.  In arriving at this credit, the lender factors in certain standard risk adjustments that are based on variables such as your credit score, loan amount, collateral type, and loan-to-value ratio.  The lesson to be learned is that your lender should always fully disclose the amount of this credit – even if it is in the form of a reduced interest rate.

Recently I had a client who was able to increase his lender credit by simply taking a few steps to improve his credit score.  After following a program of credit card debt reduction, his FICO score increased from 599 to 642.  This favorably resulted in an increase to his lender credit of 1.25% of his loan amount – a savings of $2,500 which he was able to apply towards the closing costs on his $200,000 residential mortgage.

Here’s the Point: The next time you get an interest rate quote from a lender, be sure to ask them how you can increase the “credit” to which you may be entitled to apply against your closing costs.

 

Identity Theft: Curious Advice…

idtheftImagine some guy by the name of “Greg” using your name and social security number to borrow three private loans totaling $10,000. Wouldn’t you feel violated? You would also be furious if this showed up on your credit report only 5 days before your new mortgage is scheduled to close!

The fraudster is not about to make principal and interest payments on the scam loans. So your credit score will immediately deteriorate because of late payments, which you likely won’t even know about – unless you frequently check your credit scores.

This happened to a client of mine last week. His attorney recommended that he: (i) request a fraud alert be placed on his credit report, and (ii) commence making the required monthly payments on the fraudulent loans…

PARDON??!

Imagine making payments on a fraudulent loan – and then trying to prove later that your payments should be recouped? I don’t actually blame the lawyer – because he was simply trying to stop the fraudster, and help the borrower get a mortgage by maintaining a decent credit score. What was missing, however, was that a new conventional or FHA mortgage lender will require evidence that an act of fraud had been committed – which will include the filing of a police report. The omission of or delay in filing this report gives the appearance of “hiding” the identity theft. It is very important to demonstrate to the lender that all the right steps have been taken to address the problem as quickly as possible.

Here’s the Point: You can’t hide identity theft when you apply for a mortgage. Promptly have the credit bureaus put a fraud alert on your credit report so that no further borrowing can take place without your approval.

 

Cost To Pull Your Credit Report: 5 Points*

When a third party looks at your credit score, this is called an “inquiry”.  A “soft inquiry” does not affect your credit score, but a “hard pull” does. Limiting your hard pulls will qualify you for the best interest rate available when you apply for a loan.

Here are some soft inquiry examples:

  • By credit card companies before they send you a solicitation in the mail to see if you qualify
  • By prospective employers as a part of their background checks
  • By banks to verify that you are who you say you are when opening an account

https://i1.wp.com/cdn2.business2community.com/wp-content/uploads/2013/11/credit-inquiry-blog-post-image.jpgYour credit score will not be affected if you check your own credit report. You should confirm the accuracy of what is being reported about you, and you can do so for free once per year from each of the three credit bureaus at: https://www.annualcreditreport.com (there is a nominal charge if you want to see your score).

 When you apply for a loan or a new credit card, however, the lender or mortgage broker will conduct a hard pull on your credit report. A hard pull stays on your record and it lowers your credit score by about 5 points for six months. For these reasons, it is important to guard your credit report from too many hard pulls. So if you get a store credit card just to save 10% on a single purchase, know that you have hurt your credit score – and it is probably not worth the savings.

*Source: Credit Plus, an unaffiliated company that provides third party pre-loan application and post-loan closing verification services – such as tri-merge credit reports.
Here’s the Point: Make sure you know what kind of credit inquiry is being made – a hard pull stays on your credit report and lowers your credit score by about 5 points for six months.

 

Private Non-QM Lenders Have Dropped Their Rates

https://i1.wp.com/cdn.americanbanker.com/media/gallery/p17vmmujkht5918m91cma9gu17fb8.jpg?resize=302%2C200Most lenders will only extend Qualified Mortgages. A Qualified Mortgage (“QM”) is a kind of loan having more stringent pre-qualification requirements. QM lenders must show the regulators that they have determined, prior to closing, that you, as a borrower, have the ability to repay your mortgage. This is logical, and will continue to be the norm for conservative lenders. Since these conservative lenders in turn have conservative investors who ultimately purchase your mortgage, their investors also want nothing to do with non-QM loans.

But if I lend you money at 6% (say 2% higher than conventional rates because of some additional risk) – there is no doubt that I already have an investor for the loan I just gave you who is willing to pay me, say, 6.5% for the same loan. Why would an investor do that? Because in a large financial market, he too has someone else on the line willing to pay him something more – and so on, and the business is profitable all around.

The old 12-13% “hard money” loans were being advanced to people having unfavorable credit when standard mortgage interest rates were at 5-6%. Now these non-QM lenders have lowered their rates to 6-8%, when today’s 30-year conventional rates have only dropped to about 4%. It’s not a bad deal to pay slightly higher non-QM rates for a brief period until you have satisfied your lender’s seasoning period requirement – and then you can refinance with a conventional mortgage without a prepayment penalty.

 

Here’s the Point: Interest rates for non-QM loans are a bargain right now. If your loan request was recently declined because of your credit history, there are lots of short and long-term financing opportunities available to you.

 

 

Want a Mortgage? It’s Not Enough to Just Confess Your Sins!

Lenders will discover that you had a foreclosure – that you had student loan late fees – that you defaulted on your car loan – that you already sold the asset claimed on your loan application – that you were arrested several years ago – that you neglected to meet your child support obligations, etc.

creditreportIt either comes out on your credit report or through the lender’s use of fraudguard security checks – or even when they just Google your name. Lenders have these and several other extensive background checks and “Know Your Customer (KYC)” procedures that they carefully follow.

If you don’t immediately disclose your Deed-in-Lieu of Foreclosure, do you really think they will believe you are providing them with all details on everything else for which they ask?

You will generally always need to write a Letter of Explanation (“LOX”) to address collection accounts and disputes/inquiries on your credit report. And what if your explanation is solely factual and not remorseful?

As useless as sentimentality might appear in the finance world, lenders want to look into your consciousness – otherwise they have nothing to support the notion that you will do everything you can to prevent another late mortgage payment or foreclosure. The parties recommending your loan need your cooperation in order to support you – because they only have their reputations if something goes wrong with your loan. If they have to work hard for someone who has been concealing the facts (intentionally or unintentionally), they are likely to move on to the next file.

 

Here’s the Point: Be upfront with your untoward credit history. If the lender finds out about an unfavorable fact on their own – without you telling them, they’re not likely to (and shouldn’t) extend you a loan.