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.
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:
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.
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.
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:
Your 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.
Most 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.
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.
It 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.
Your lender will eventually sell the loan they advance to you – it’s pretty much a given. They will do everything they can to “check the boxes” prior to approving your loan in order to make sure that either Fannie Mae will buy your loan, or that FHA will insure against the loss of principal.
Let’s say you just squeaked by with a Debt-To-Income Ratio of 43% (maximum percentage allowed under a Qualified Mortgage). Or, maybe your credit score just barely meets the lender’s minimum 620 requirement. Perhaps your income reduced over last year, and you know that the average earnings to support your loan will be tight.
If the decision is too close to call, your loan will be declined – that’s just the way it is today. So here are some discretionary “Compensating Factors” that can help to persuade the underwriter to stamp “approved” on your loan application: