5 new barriers to getting a mortgage
It's tougher to get approved, but knowing the obstacles will help you prepare to buy a home.
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Are you having trouble getting approved for a mortgage? Ever since the housing bubble burst, lenders have been subjecting mortgage and refinance applicants to stricter criteria. Here are five reasons why people are finding it more difficult to get approved these days.
1. Lender paranoia
Mortgage lenders naturally want to avoid repeating mistakes, so it's not surprising that they would look more closely at applicants' financial situations. But changes in the secondary mortgage market have made them extra cautious.
Greg Cook, a licensed California real-estate broker and mortgage banker, says that it used to be easy for lenders to get their loans insured by the Federal Housing Administration or guaranteed by Fannie Mae or Freddie Mac (Bing: Find an FHA lender). Only in the case of fraud would these organizations require lenders to repurchase a mortgage.
"Now, if FHA feels the lender didn't follow guidelines, (it) can refuse to insure and the lender has to pony up the cash to replace the funds on (its) warehouse line," Cook says. "Multiple buybacks can bankrupt a small lender."
With lenders facing greater responsibility for the loans they originate, they have no choice but to be extremely cautious in approving borrowers.
2. Restrictions on eligible income
Do you earn income from a second job? While this money might be significant to you, providing some real breathing room in your monthly budget and stability in your finances, lenders might not care.
"Income from a second job is generally not allowed, unless it has been derived from the same source for 12 months or within the same exact field for 24 months without any more than a 30-day interruption," says Wendy Hooper, an Orange County, Calif., real-estate agent. "And it is usually not allowed at all if it is not documented on a W-2."
Unfortunately, many people receive the income from their second job in cash. Even if you deposit the cash in your bank account and declare the extra income on your W-2, lenders may not be willing to consider this income.
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"Lenders are now requiring all bank deposits that are not direct-deposit payroll be verified," Cook says. "In our previous life, if the borrower's income supported deposits ... explanations weren't required. Because it's virtually impossible to verify cash deposits, loans are being denied."
3. Tighter income-verification standards
Lenders will now rigorously scrutinize any income that borrowers want to be considered in their ability to repay a loan. There are no stated-income or low-documentation loans for most borrowers anymore, which is bad news for self-employed borrowers.
But they aren't the only ones having trouble. Lenders' fears about cash deposits mean that people who work in an industry where being paid in cash is common, such as the restaurant business, might have trouble getting approved.
People who are expecting to have children should also proceed with caution, as a New York Times article pointed out.
Amy Tierce, a certified mortgage-planning specialist with Fairway Independent Mortgage in Needham, Mass., says that lenders are cautious because "often, babies are born and parents have a change of heart about working full time or working at all."
She says that borrowers on maternity leave will need to validate that they are on paid leave; borrowers not on paid leave can buy before the delivery while their income can be verified, buy when they are back at work or try to qualify on one partner's income.
Tierce, who has been in the mortgage business for 20 years, explains, "Guidelines such as the one cited in The Times piece have been on the books forever." But in the past, buyers had more options to get around this guideline.
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Underwriters are reviewing credit reports and looking for things like limit vs. high balance on credit cards and if your balances ever exceeded the high limit they can and will use this as reason to deny your loan!
More and more lenders are increasing the minimum credit score to 640+.
Lenders are adding debt to income ratio limits of 45% - not that this necessarily a bad thing but it's a blanket that doesn't fit every individual.
I just closed a
<A href="http://www.valoansdoneright.com">VA Jumbo Mortgage</A> on a 30 year fixed at 4.25% with no points even though the buyer's debt ratio was over 60%!
What's really sad is with interest rates as low as they have ever been (4% +/- ) a lot of people can not take advantage of it.
Another barrier is they can turn you down if they don't like the color of your sneakers (lol!) Honestly, they are looking for reasons to turn people down, so you don't want anything hanging out there that they can point to. Mortgageman nailed it - get rid of the ride & get transpo that's paid for. I could go out & pay cash for a new Bimmer, but I choose to drive my 10 yr old pickup w/ 125K miles on it. Bimmers suck anyway, figure of speech! Also, my experience tells me to deal w/ a good mortgage broker, don't waste your time w/ nitwits in B of A or Chase
So The only barriers I see to obtaining a mortgage, are basically the barriers that existed before wall street and big banks ran out of qualified loans to bundle and sell to pension funds. If you want to buy something, anything , and you can't pay cash you should be expected to show the ability and track record of paying the money back under the agreed terms. In recent years home buyers have looked at their mortgage holder as a partner when values drop and themselves as the sole beneficary when values go up. You should be a one time only player when you play that game.
First, what's with the cut and paste of article bits into the comment section......and the cartoon faces. Come on people!
Now I have no affiliation with any bank or mortgage co. but do have some thoughts aimed at people that are obviously suffering related to having less disposable income now than they once had, and therefore are having major problems paying the mortgage.
Loan modification - Lenders should do all they can to modify someone's mortgage if, and only if, the borrower can prove a legitimate hardship (loss of job, reduction in hours, serious medical issue, divorce). Being underwater, they can't pay the mortgage and boat payment at the same time, neighborhood has gone to hell, dog barking next door are not legitimate hardships and if these people stop paying their mortgage, out on the street they should go. Modifications should be limited to extending the term of the loan (35, 40, 50 years) or postponing the interest portion of the payment for a period of time (interest would accrue and be spread out - amortized - over the remaining term of the loan). Even stopping payments all together for a set period of time (in the case of job loss) and extending the loan term for that period would be a good proposal.
These plans would certainly give the borrower a chance to recover and also ensure that the lender gets back what they are owed (and then some in the case of increasing the term). Everyone should be happy. There should be no dismissal of financial responsibilities but rather a modification of loan terms to suit the new borrowers situation. The loan modification process needs to be streamlined and standardized across the industry to ensure a rapid and simple process for all. But again, not all will qualify for modification but the reasons (for not qualifying) will be clearly defined so ther is no ambiguity or misunderstanding.
These articles tend to polarize commenter's into two groups. One group representing the people struggling to keep their mortgage paid and to stay in their house (or have already lost their house) and understandably are so enraged at everyone and anyone related to the RE or mortgage industry.....or you have the (majority) of people who are working hard to pay their mortgage and as much as they do have sympathy for the people at risk of foreclosure (or have suffered a foreclosure) due to legitimate hardship, they have no sympathy, and even obvious anger, towards those that have defaulted on their financial commitments due to less than legitimate hardships and are contributing to the financial distress we are all suffering whether they realize it or not.
Unfortunately, many people have been laid off or their jobs cut and hours reduced and the though of these Banks not helping those previous borrowers is a joke. What needs to happen is not tighten standards but, allow those people who where homeowners to take over another loan that they can afford and get these foreclosed homes off the market. These banks should be looking at long term history and trying to stable the market than rather hold on to these homes. These banks and credit unions should be ashamed of themselves for not working with those past homeowners who have already proven themselves as being able to pay. The thought of these banks knowing that if your hours or job has been reduced than what makes them think that you are going to make payments on the income you had previously, doesn't it make sense to use current income. I have seen for myself how the banks and credit unions are tossing people and their kids out on the street because of this factor. Most now are renting dumps or living in apartments and for those seniors it is just not right after years living and paying your dues, it is just sick. The president is joke to because he should have made it (forced upon)(mandatory) to these banks and credit unions to help instead of giving them the option. The banks know they do not have to work with anyone and that is the sad thing, many are losing the battle against the mortgage companies and not until these home sit on the market for months and years they might get a common sense. Until the law is changed to include the primary home in BK and give the judges the authority this is not going to change. The president should be doing more to enforce these changes but, until this happens the market is going to hit rock bottom and than its going to be late. Lenders are not doing anything accept turning people away because they know they do not have to do a thing. Loan modification system does not work and many are rip offs because they have to be bonded in order to work and appoved by the court. Even with the assistance from the courts, the lenders still do not help and borrowers have proven lost job, cut in hours, hardship towards illness, and still it does not matter. I had a lender who told the borrowers to tell the governement to hurry up and provide letter on SS claim and their was nothing they could do and told them to pack up and tossed them out on the street, that is just not right even though they had lived in the place for 14 years and had stable income and never late, until medical issues. Just plain wrong