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When a Lender Denies Your Mortgage Application

February 26th, 2015 7:21 AM by Jackie A. Graves, President

 

 Credit: Chris Gash

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.

Some jumbo-mortgage 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 reserves.

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 changed jobs.

Anyone changing jobs and purchasing a new home should obtain a guaranteed compensation plan in writing from the new employer, Mr. Rosenbaum adds.

loanrejectiongraphic

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 largest banks.

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,” he adds.

  By: Anya Martin | To view the original article click here

Posted by Jackie A. Graves, President on February 26th, 2015 7:21 AM

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