February 26th, 2015 7:21 AM by Jackie A. Graves, President
It’s like getting a
“Dear John” letter from the bank. You’re ready to make an offer on a house, and
your mortgage application is denied. But as your mother told you, there are
plenty of fish in the sea.
lenders, often smaller banks or credit unions, will be more flexible about the
three key factors to qualify—credit score, proof of income and the percentage a
borrower needs to put toward a down payment, says Greg McBride, senior
financial analyst for Bankrate.com.
These lenders have
more leeway qualifying jumbos—loans above $417,000 in most areas and $625,500
in some high-price places—because they hold them on their books or sell to
investors as mortgage-backed securities. Mortgages below that threshold must
meet stricter government standards for conventional loans.
Lenders are expanding
their jumbo offerings, according to the Mortgage Bankers Association, a trade
group for the industry that tracks the availability of credit.
Lenders who reject a
borrower are required by federal law to issue a written “adverse action notice”
or statement of credit denial giving a reason for the denial. This document is
issued typically within 48 hours after the verbal notification, says John
Walsh, president of Milford, Conn.-based Total Mortgage Services.
About 14.5% of all
home-purchase loan applications and 22.7% of refinance applications were denied
in 2013, the most recent year for which federal data are available. That’s down
from a peak of 18.7% of home-purchase loans and 39.6% of refinances denied in
2007, amid the mortgage meltdown. These numbers include both jumbo and
conforming loans, which are backed by government programs such as Fannie Mae.
The top denial reason
reported by lenders across both purchases and refinances was applicant credit
history, according to the federal data collected from lenders under mandates
from the Home Mortgage Disclosure Act. Other top reasons include a high
debt-to-income ratio, a reflection of the borrower’s income relative to monthly
payment amounts, and borrowers with insufficient collateral, also known as
Alan Rosenbaum, CEO of
New York City-based Guardhill Financial, says when jumbo borrowers are
rejected, it’s often for volatile income that fluctuates with bonuses and
commissions—especially for people in the financial sector who have recently
Anyone changing jobs
and purchasing a new home should obtain a guaranteed compensation plan in
writing from the new employer, Mr. Rosenbaum adds.
Jumbo borrowers may
get a broader sense of their chances of qualifying by opting for a mortgage
broker or banker because both have access to multiple lenders for
cross-comparison. For example, a mortgage broker or banker may service some 20
different investors, including some that will accept a credit score as low as
660, as well as being able to access loan products from some of the nation’s
Borrowers should also
keep in mind that a mortgage denial doesn’t turn up on their credit report. What
does is a credit “inquiry,” but credit inquiries only account for 10% of the
score. Multiple inquiries for a mortgage in one month are aggregated as one,
and lenders expect a borrower to shop around, Mr. McBride says.
Many lenders also have
simulation tools that they can use to test how specific action, such as paying
off credit card balances, will impact a credit score, says Mike Jones, national
sales manager with Strongsville, Ohio-based Union Home Mortgage. These computer
models can also be used if borrowers aren’t rejected but just want to improve
their score to qualify for a lower interest rate, he adds.
While actions to
improve one’s credit usually take at least 30 days to show up on a credit
report, borrowers can pay the credit-reporting bureau a small amount, usually
about $35, for a “rapid rescore” within three days.
Of course, it’s always
better to have one’s credit history in line before applying for a mortgage.
Here are a few advance tips:
• Hold off on other
credit. While lenders
know you will only need one mortgage, hold off on new credit cards or a car
loans that raise your debt-to-income ratio for 90 days before you apply for a
mortgage and during that process, Mr. McBride recommends.
• Limit those
deductions. Federal law
requires a 43% or lower debt-to-income ratio for a mortgage approval, though
lenders who keep the loans on their books may have the leeway to lend to
someone with a higher ratio if a borrower has assets or reserves. Still,
self-employed borrowers may wish to limit deductions on the past two years of
tax returns to indicate a higher annual income, Mr. Walsh says.
• No bankruptcies or
foreclosures. Jumbo borrowers with
either of these on their records should not apply for four to 10 years,
depending on the lender, no matter how much their financial profiles have
improved otherwise, Mr. Walsh says. “The only thing that fixes these is time,”
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