September 12th, 2014 9:22 AM by Jackie A. Graves, President
In the early
days, if you wanted a mortgage loan, you had to have a job, some down payment
money and good credit. While that's still true today, loans are more difficult
Lenders look for more information about you, making the process
take longer than it used to. If you're wondering why, the reason is buy backs.
A buy back is a loan that the lender originally issued and then sold to another
lender, mortgage servicing company or to Fannie Mae or Freddie Mac.
If the borrower defaults on their loan, lenders
want to know why. Fannie and Freddie look to see if there was a problem
in underwriting or something fraudulent about the loan that contributed to the
borrower's default. If so, the lender could be forced to buy the loan back.
Explains David Reed, author of Mortgages 101, "When a mortgage company makes a home
loan, it doesn't pull money out of its savings accounts, but instead utilizes a
credit line from which it draws. The lender approves a loan, draws down its
credit line by $300,000 to issue the mortgage. If a lender does this several
times a day pretty soon that credit line would start to look a little thin.
When a lender needs to replenish its mortgage coffers, it sells the loans it
has already made to other lenders."
There are specific purchase agreements between lenders
who buy and sell loans. These are called conforming
loans, because the loan must meet certain criteria to be eligible
for purchase by a secondary party. It can't exceed a certain amount, may
require a minimum down payment and the credit scores of the borrowers may not
be below 620, for example. That way lenders who buy loans don't have to
re-underwrite a loan that's been certified by the original lender as a
"sellable" mortgage, says Reed.
To avoid any potential buy back, lenders today are
asking for more documentation than previously required, or asking that
borrowers meet stricter credit terms than those required for conforming loans.
The result is that lenders are taking more time to close loans.
Reed points out that if one were self-employed, the
underwriter would ask for maybe one year's tax return. "Now, two years
returns are required, and even three years, if the underwriter feels
uncomfortable with a loan," he says.
The bottom line for borrowers is be prepared to
offer more documentation and for the purchase transaction to take longer. That
doesn't mean the lender is going to decline the loan.
In fact, one way to look at the situation is that
it's an advantage for borrowers. It may be tougher to get a loan, but it's also
going to be tougher to default.
Written by Blanche Evans | To view the original
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