Exposed: How Mortgage Lenders Are Stopping You From Getting a Home Loan
Ten Steps to Getting A Great Mortgage and Getting the Mortgage Approved
With mortgage rates at historic lows and likely to stay that way for the next few months, you may be thinking that this would be a good time to buy a new home, a vacation home, a residential investment property, or to refinance existing mortgages you hold. One thing can be said for certain, there has never been a better time to get a mortgage, that is, if you can get one!
The news is full of the reasons why you can't, and there is much frustration among professionals in every part of the real estate industry. Low prices on properties coupled with unbelievable low rates on loans should mean a robust market. But by some analysis, 50% of all loan applications are being turned down. Here are ten steps you can take to optimize your chances for being approved.
1. Income clarity - Unlike the heady days of the 2000's, today you will need to prove your income. If you are employed, make sure that your employer is showing all income. If you are taking any income in the form of cash, gifts, barter, or other approaches that are not showing on your W2, it would be far better to change to placing everything on payroll.
if you own your own company, you may have some of the same issues as above. Paying yourself as a W2 employee may simplify your application. In any case, if you are a substantial owner of your company, you will need current profit and loss statements in addition to at least two years of history. As with the payroll issue, it is far better for the purposes of securing a mortgage if you are choosing to show excellent profits, rather than using every possible way to reduce income for tax purposes.
If you believe that your W2 or business income can be improved with some changes in your methods, you may want to hold off on the mortgage for a few months until these changes are effective and clear.
You might also have "imputed income from assets that do not provide actual income. We can help you to assess the potential to show such income on your application.
2. Credit Score Improvement - Your credit score can keep your from getting any consideration for a mortgage, and it can dramatically impact the rate and other terms of your mortgage if approved. There are many online resources for checking a credit score, and you You can get a free report once every 12 months from each of the three credit reporting companies — Experian, TransUnion and Equifax. But you may want to call me at 310-295-6213 and I will get you the credit score mortgage lenders will use. It is different than the others.
A credit score under 620 will very likely disqualify you from any standard mortgage. A credit score above 740 will generally qualify you for the best rates and terms. In between these two results, a great broker can help you to get the best possible deal. But, if you can improve your credit score, you may be able to save $1000's in interest charges over the years. A single percentage point difference can cost $85,000 over the life of a $400,000 loan.
Once you have your credit report, check to see if there are any errors. Report these to all reporting agencies, or directly with the company that issued the incorrect information. It can take 90 days to resolve these disputes.
Next, pay down your debt as much as you can. Don't close unused credit cards, but don't open new cards, either. If these efforts are not enough, or if you have substantial problems on your credit reports, you may want to use a professional to help you improve your score. Many companies who offer these services are more talk than action. Call me for the name of a trusted credit repair company.
3. Set up your plan - Create a realistic budget to determine what you believe you can handle. There are many excellent free budgeting formats online. If you are considering purchasing your first home, keep in mind that there are many expenses associated with home ownership that you don't now have with a rental. Among other things, utilities will cost more; furnishings, wall hangings, flooring, and window treatments are huge expenses; gardening and lawn care; maid service; appliance purchases and repairs.
4. What kind of loan? - Fixed mortgages provide the security of
knowing your interest rate and payments will never rise; with rates
currently at record lows, a fixed rate mortgage may be the best option.
Adjustable rate mortgages provide even lower starting rates, which can be fixed for the first five or so years, depending on the plan. Historically adjustable rate mortgages offer the least expensive approach over the term of the loan. They are an excellent choice if you expect to move within a few years. On the other hand, they are not the right choice if you are not confident of being able to handle larger payments in future years.
A longer term such as a 30-year loan will keep monthly payments lower, but if your budget can handle it, a 15-year term provides a lower interest rate and will save you
tens of thousands of dollars over the life of the mortgage. A $300,000 mortgage
at 3.7% for 30 years costs up to $497,466. A 15-year loan at 3.0% will save more than $120,000.
Should you have less than 20% for the down payment, you should consider an FHA approved loan or a conventional mortgage with PMI (private mortgage insurance).
You can move into a home with as little as 3.5% with an FHA loan, but they carry an upfront fee of 1.75% of the mortgage amount, and an annual fee of 1.25 percent.
PMI is cheaper, typically less than 1 percent a year, depending on the borrower's credit score and down payment. PMI can be cancelled when the borrower reaches 20 percent equity in the home. Typically you will need 5% down with PMI and a better credit score than with an FHA mortgage.
5. Shopping for a lender - For over 5 years, many lenders have not really been that anxious to write new mortgages. Because of new restrictions imposed by federal law and rules promulgated by banking regulators, lending standards are far more strict and profit margins strained. the end result is that you will need to shop harder than ever to get the best loan with the best terms.
As a mortgage banker, 80% of the loans i originate go through our own bank. However as a mortgage broker, I also have access to many other banks and lenders including hard money lenders. In this way I can do the shopping for you, and find you the best possible resources.
When shopping, we look at every aspect of the cost of the loan: The actual interest rate, points, processing costs, and mortgage insurance as mentioned in #4 above. The goal is to exactly meet your needs for the lowest overall cost.
6. Preapprovals Make Sense - There are two types of preapprovals. On is a prequalifation letter. This type of letter provides an informal estimate of the size loan you can handle. A Preapproval letter is preferable. This is a commitment (though with strings attached) by the lender to lend you a certain amount.
When you are shopping and are able to provide a preapproval letter in combination with a strong credit score, the seller will see you as serious, and will help you in a competitive bidding situation. Cash offers speak the loudest, but a prequalified buyer may be chosen over a less another buyer who does not have the letter, even if the bid is higher.
7. Details matter today - Be prepared for some nitpicking by the lender even after the preapproval. In the current climate every loan underwriter is being carefully watched by management to be certain that everything is double and triple checked.
8. Paperwork rules - Because the details matter so much, you should be prepared to provide proof of everything on paper. The vast majority of loans are sold to Fannie Mae or Freddie Mac. Their underwriting requirements are very stringent, which puts more pressure on the bank to get everything exactly correct. You will be asked for tax returns, pay stubs, rent receipts, banking information, business profit and loss statements, and documents proving certain types of assets.
You can cut down on the time required to close a loan by getting these types of documents organized well in advance.
9. Rate Locking - Some loans close in less than 30 days. Others drag on for 90 or more. During the period between the formal application for the loan and the final closing, the rates may go up or down. Unless you lock in the rate, you will pay the rate that is in effect at closing.
Because the bank is taking a risk that rates will go up during that period if they lock in your lower rate, they will generally charge a fee for locking in the rate. Some lenders may provide a short term lock at no charge, so be sure to ask for it. Very few banks will lock for 60 days or longer, and with interest rates this low, it might be wise to pay a small fee to lock for 60 days or longer.
10. It ain't over until it's over - Another result of the closer scrutiny from Fannie, Freddy, FHA, and the lenders themselves, your credit will be reviewed again just prior to closing. It is not unusual for loans to be thrown into limbo or completely turned down after this final analysis.
Make sure that you keep your financial ducks in a row during this time. No job changes, major purchases, new credit cards opened, or business ventures started. Don't miss a payment or argue with a creditor until after the close.
None of these 10 recommendations for smoothing the process to a loan should discourage you. We are getting most loans through the process at this time, even though almost every loan will have a difficult day or problem to overcome. We are experts at overcoming those issues and finding ways to help qualified buyers accomplish their dreams and goals.