As the jumbo loan and refinance market begins to pick up, it’s important to remind consumers of important tips to ensure their credit is and remains in good standing before applying for a mortgage – and what to do if they are turned down for a mortgage.
In general, lenders have more flexibility when qualifying borrowers for a jumbo loan ($417,000 in most areas and $625,000 in some high-priced areas) since mortgages below that threshold must meet stricter standards for conventional loans. Borrowers who are denied a mortgage because they do not meet qualifications must be sent an “adverse action notice” or a statement of credit denial providing the denial reason, which is typically sent within 48 hours after verbal notification.
Another important tip for the consumer is to avoid opening any new credit cards or a car loan as this can raise their debt-to-income ratio for 90 days before applying for a mortgage. Limiting deductions can also help maintain a lower debt to income ratio, as self-employed borrowers may want to limit deductions on the past two years of tax returns to indicate higher annual income. Jumbo borrowers with either a bankruptcy or foreclosure will also need to wait to apply for a mortgage for 4 to 10 years depending on the lender, even if their financial situation has improved.
As always, communication is critical – borrowers need to spend time with a trained loan officer finding out the process and answering the “what if’s”!
What is “mortgage insurance”? Does it affect me? Mortgage insurance, commonly known as “MI”, is insurance on your mortgage. In other words, basically it is insurance payable to a lender and is used to offset any losses in the event that you, as the borrower, are not able to repay the loan AND the lender is not able to recover its losses in the event of a foreclosure. Just like life insurance, which depends on the insured’s health, age, etc., or automobile insurance, which depends on the vehicle, the owner’s driving record, etc., MI depends on the loan’s loan-to-value (LTV), the loan term and type, the coverage amount, and how often the payments are made. The majority of loans under $729,750 with an LTV greater than 80% require mortgage insurance. And the cost of mortgage insurance is determined by the loan amount, LTV, occupancy, credit score of the borrower, etc. One option that borrowers may use, in the event that the loan’s LTV is greater than 80%, is a 2nd mortgage rather than pay for mortgage insurance. Your loan agent can work with you on explaining this.
Depending on the plan, the MI may be payable up front when your loan closes, or it may be capitalized onto the loan in the case of single premium product. Once the LTV is reduced to less than 78%, or less, based on the original appraised value or purchase price, either through paying down the principal or the home appreciating, the MI is often no longer required. This can occur via the principal being paid down, via home value appreciation, or both. The company or person servicing the mortgage usually makes the request. Some programs involve the lender paying for the MI rather than the borrowers, and may involve adjusting the original interest rate of the loan to cover those costs. FHA loans also have mortgage insurance, so it is not restricted to only conventional (Freddie & Fannie) loans.
What are top originators telling their clients about the appraisal process? Some have created a table of helpful information that those refinancing can provide that will make things go more smoothly. Recent regulations have prohibited borrowers from trying to influence their appraiser, but it is important for the borrower to provide information that is important for the appraiser to consider in valuing the home. Communication is critical, as is the quality of that information.
Appraisers are primarily concerned with recent market sales, but it is important for borrowers to remember that this is only part of the valuation. Appraisers usually use three approaches in determining the value of a house. The first is the cost approach (the buyer will not pay more for a property than it would cost to build an equivalent). The second is the sales comparison approach (comparing a property's characteristics with those of comparable properties that have recently sold in similar transactions). And the third is the income approach (similar to the methods used for financial valuation, securities analysis or bond pricing).
There are questions appraisers often ask homeowners. Homeowners should save information about any renovations. Borrowers should try and be specific about the upgrades and when the remodeling was done, such as upgrading the AC unit, adding insulation and painting the interior of the house. A refinancing borrower can certainly inform the appraiser of the reason why they bought the home and things about the neighborhood that may attract buyers. The other information about the neighborhood section can be utilized for further explaining any relevant changes to the neighborhood such as parks, streets, land uses, businesses, etc.
The key to this process is sharing enough facts to the appraiser so they can accurately assess the property. Once again, the information provided is in no way intended to sway the appraiser a certain way, it’s merely informational, as this will be pertinent information the appraiser will ask the borrower whether or not it is provided upfront. Showing initiative in data gathering will aid the appraiser’s process and may even speed up their assessment which will benefit everyone involved in the transaction.
Plenty of new borrowers are buying a new home and selling their old home. With all the changes in the mortgage world, can this still be done? Sure it can – it just requires a game plan, and a good lender and real estate agent can help.
The homebuyer often needs the cash proceeds from the sale of the current home in order to qualify for the new mortgage on the new home. Each situation is different but selling first and then buying second would be ideal; however, this method probably involves moving into a temporary rental in the interim – and few people want that.
Bridge loans, once popular, would provide the home seller cash from an interim loan that would be used as the down payment of the new home. The interim loan is secured by the departure home and would be paid off as soon as the departure home was sold. This way, the homebuyer could conceivably buy their “move-up” home before selling their departure home. The trouble with this arrangement is that the homebuyer potentially now has three mortgages: one on the departure home (assuming it is not free and clear); one on the new home and one on the interim loan. Not many homebuyers can qualify for three mortgages unless they have excellent income and low mortgage payments. Even if the homebuyer could qualify and make all of the mortgage payments, what would happen if the departure home did not sell?
The good news is that it is possible to sell a house and buy a house at (almost) the same time but to get the timing right it takes cooperation from the people who are buying your home and the sellers of the home you are buying. Unless you could qualify for two mortgages (one on the current home plus one on the move-up home), this method would involve a contingent offer. Your offer to buy your next home would be contingent on your current home selling first. In this hot real estate market, however, it might be rare to find a seller willing to accept your offer – there may be other buyers without this in their contract.
What about turning the old house into a rental? Those homeowners with enough cash for a down payment on their next home frequently ask about keeping the departure home and using rental income to offset the PITI (principal, interest, taxes, and insurance). While this is a potentially good way to be able to make two mortgage payments affordable, Fannie Mae and Freddie Mac have established some strict restrictions. First of all, the departure house that is to be rented must have 30 percent equity (70% or lower LTV) or 25 percent if the new loan will be an FHA loan. The departure home must have a signed rental agreement with the prospective tenant and the tenant’s deposit money must also be in the hands of the homeowner. If all that is in place, the landlord will be allowed to use just 75 percent of the rent to offset the PITI.
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Borrowers know that once they apply for a loan (practically any loan), the lender will underwrite the loan. The underwriting time it takes to review the loan, looking at the borrower’s income, credit report, appraisal of the property, and so on, varies by type of loan and lender. But borrowers should know that approval is never a sure thing, even if they have millions in the bank, or a flawless 850 FICO credit score.
We mention this because the Federal Financial Institutions Examination Council (FFIEC) released Home Mortgage Disclosure Act (HMDA) data. The report shows loan approvals AND declinations: hundreds of thousands of loans needed to purchase homes were rejected. Yes, some of these borrowers went to another lender, but it is a useful exercise for potential borrowers to know why previous borrowers were turned down. And yes, the 5 C’s of credit matter: character, capacity, conditions, capital, and collateral.
The broad categories for turn downs include credit history, affordability and income, assets and down payment, and property issues. The list of reason start with the top five: loan amount too big, income too low, inability to document income, using rental income to qualify, and the DTI ratio being exceeded.
Moving down the list, the FFIEC’s HMDA data shows mortgage rates rise and push payments too high, payment shock, LTV (loan to value) too high, inability to obtain secondary financing, and underwater on mortgage. (Remember that there are programs for such individuals.) Next is not enough assets, unable to verify assets, no job or job history too limited, changed jobs recently, self-employment issues, using business funds to qualify, limited credit history, credit score too low or the spouse’s credit score too low, and so on.
It is not difficult to see that the reasons all return to the 5 C’s of credit, and these need to be kept in mind when applying for a loan, and for dealing with underwriting conditions.
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