What Does It Take To Get A Mortgage
It’s worth noting that with mortgage loans, there is always an exception to every rule. For example, when my wife and I recently purchased the condo we live in, our bank granted an exemption on verifying our tax returns with the Internal Revenue Service because we had our identities stolen to file a fraudulent tax return the previous year.
That exemption, which would have been easy to come by in 2004, was only granted because we were well-qualified, buying much less home than we could technically afford, and were putting 25% down. Had one of those three not been true, we may well have been denied.
In general, however, a credible mortgage company wants to see borrowers conform to the 28/36 rule. This means that the household should be spending no more than 28% of its verifiable monthly income on housing expenses and no more than 36% on revolving debt in total.
The other major factor beyond income is credit score. There is no hard and fast rule for credit, but the Federal Housing Administration , which helps first-time buyers, requires at least a 580 for its loans with the lowest-required down payments. In general, borrowers falling into the poor-to-fair credit range — 501-660 — will face a harder time. It’s not impossible to get a loan with credit at those numbers, but interest rates may be higher, and higher down payments may be required.
Your Ex Partner’s Score Can Wreck Yours
If you’re financially linked to someone else but you’re now separated or have nothing to do with them, then de-link yourself.
If not, any late payments or misdemeanour they’ve committed will reflect badly on you. Write to the credit agencies and ask for a notice of ‘disassociation’.
You could still be linked to old flatmates if you had a joint bank account for bills, so it’s worth checking that their credit history isn’t affecting yours. If it is, de-link yourself quickly.
Even if the person you’re linked to has a good history now, you still risk problems in future if they miss payments. The guide has full details of what to do.
The Government Is Clamping Down Hard
Since 2009, the government has created enormous regulation for banks in order to not repeat the housing crisis again. For example, the CPA letterhead and signature requirement was introduced recently in Feb, 2014, and its causing massive headache for tons of small business owners in America. CPAs are charging usurious fees to audit because they can. Meanwhile, the government makes us send a new 7-10 page Good Faith Estimate every single time we change a single number.
The rules were created by the Consumer Finance Protection Bureau and were mandated under the Dodd-Frank Act to ban many of the loose practices during the housing bubble e.g. NINJA loans. To be considered a qualified mortgage, a loan amount cannot exceed a total debt-to-income ratio of 43%. In the past, plenty of borrowers were up to 70%+ . Average mortgage refinance or new mortgage lengths have doubled in the past four years as a result.
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Test Drive Your Mortgage Chances
Once you’ve done all the steps above, your finances should be in great shape. To test this, a mortgage agreement in principle , offered by many lenders, is the acid test.
It’s a conditional offer saying you may be accepted, based on a quick check of your income and, probably, your credit file. However, it offers no guarantees and it’s not compulsory. But for first-time buyers especially, it boosts estate agents’ or sellers’ confidence that you’ll be able to complete the sale, so may up your chances of having an offer accepted. Some worried sellers might only accept viewings where you’ve had a mortgage AIP.
It’s worth benchmarking a top deal with our Mortgage Best Buys tool, and asking the lender to see if you pass the checks for their AIP. Don’t worry just as it doesn’t tie them in to lending to you, it doesn’t mean you have to borrow from that lender if you spot a better deal further down the line.
Beware too many of these checks in a short space of time could harm your credit rating if the lender does a credit check and marks it on your file. This could damage your mortgage application later on.
Some lenders offer a ‘soft’ search option, which won’t be visible to other lenders . Find out from the lender which it is before agreeing to one.
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We Dont Want To Get Burned Again By Liars
Borrowers signed a contract stating theyd pay their mortgages on time if we lent them the money and many didnt. If everybody just paid their damn mortgage, this economic downturn wouldnt have happened in the first place! Where I come from, if you dont pay back your debts, you get beaten up, shamed, and thrown in jail. Only in America do people save so little, borrow so much, and have the audacity not to pay back a person or institution who lent them money in good faith.
Just think about the responsible homeowner who paid her mortgage every month during the downturn. Why should she suffer because her neighbor decided to welch on her promise? Good and honest people got screwed and they should be angry at their neighbors, not the banks who also got screwed. Borrowers who lied to us got bailed out with mortgage debt forgiveness programs by the government. Borrowers like to point out banks got bailed out too. But guess what? Im a person, not a bank.
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New Strategies Could Make Small Mortgage Lending More Attractive
Despite the regulatory and market barriers previously outlined, many banks continue to offer at least some mortgages of less than $150,000, and housing advocates have had some success encouraging mortgage lending in lower-income neighborhoods by invoking the Community Reinvestment Act or using public pressure. Further, some promising recent technological developments could help modernize underwriting in a way that makes safe small mortgages more attractive to lenders.
In particular, new, largely automated underwriting models augment credit reports with cash flow data, transaction information from a prospective borrowers checking account and a review of rent, utility, and other routine payments that are not reported to credit bureaus. This approach helps reduce reliance on traditional manual reviews of pay stubs, tax returns, and other documents, reducing lenders expenses associated with the assessment of an applicants finances. Some evidence suggests that these procedures are at least as effective as traditional approaches in predicting borrowers likelihood of successful repayment. For instance, a recent FinRegLab report found that the cash-flow data approach is as good as traditional underwriting at identifying risk and enables lending to customers who lack a conventional credit score.
Alex Horowitz is a senior research officer and Tara Roche is a manager for The Pew Charitable Trusts consumer finance and home financing projects.
Rejected Stop Before You Make Another Move
If you’re rejected FREEZE! Don’t automatically apply again with a different lender. Too many applications will mess up your credit score, so don’t do it. Instead, the first thing to do is to check your credit file again. Could you have missed something?
At all costs, avoid the rejection spiral. The nightmare example works like this:
This continues, until finally you check your files and get the error corrected. So…
- You apply again
- You’re rejected because of recent ‘searches’
If you’re rejected once, immediately go to the top of this guide and follow the steps we’ve set out, or you may mess up your score as more applications mean more searches, which will compound the problem.
If you haven’t missed anything and your credit file’s still looking good, it could just be that the lender you applied to had its own reason for turning you down. It’s worth asking the lender why.
It should indicate to you the main reason you were turned down and will tell you if that was your credit file.
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Reason #: Mortgages Give You Greater Liquidity And Flexibility
To help you understand this, let me introduce you to Nervous Nick and Smart Sam.
They have the same income and expenses, and are in the 24% tax bracket. Each has $100,000 in cash each wants to buy a $300,000 house.
Smart Sam gets a $240,000, 30-year mortgage at 3%. He makes no extra payments. But Nervous Nick takes a different approach. Nick hates mortgages and wants to get rid of his mortgage as quickly as he can. He fears that if he has a mortgage, he might one day lose his house. He doesnt quite understand how that could actually happen, but his granddaddy told him that mortgages are bad, and Nick believes his granddaddy, so he goes with a small mortgage as small as possible. That means he uses his entire $100,000 in cash to make a down payment. His mortgage is therefore smaller than Smart Sams $200,000.
Nervous Nick also gets a 15-year loan instead of a 30-year loan, because he hates mortgages and he figures the 15-year loan will let him get rid of his loan in half the time. Nick also knows that this clever ploy garners him a lower interest rate, because lenders charge less for 15-year loans than they charge for 30-year loans. So while Sam is paying 3%, Nick is paying only 2%.
Smart Sams monthly payment is $1,012. Thanks to amortization, 59% of Sams payment is comprised of interest. Thus, on an after-tax basis in the 24% federal income tax bracket, Smart Sams payment costs him $862 a month.
Mortgage Requirements Are Now Loosening Again
According to the Mortgage Credit Availability Index from MBA, those high standards are finally starting to ease up.
The MCAI increased by 2.2% overall in April, which indicates standards are getting less strict.
Conforming loan requirements
Standards for credit score, down payment, and other criteria loosened the most on conforming loans, with a 12.6% jump over the month.
Conforming loans are those that meet standards set by Freddie Mac and Fannie Mae. The agencies allow credit scores starting at 620 and down payments of 35% or higher.
However, lenders are allowed to set their own, stricter requirements on top of Fannie and Freddies . These overlays are the reason mortgage requirements vary so much from one lender to the next and the reason some lenders are reopening to lowercredit borrowers faster than others.
If you think you should qualify but get turned down by one lender, its worth applying with a few others to see if their different guidelines can work in your favor.
Requirements for other loan types
Jumbo loans which are reserved for higherpriced property purchases also saw a big availability increase of nearly 7%.
Government loans, which include FHA, USDA, and VA mortgages, arent seeing the same trend, according to MBAs data.
The MCAI for these programs increased a mere 0.1% from March to April, indicating lending standards are largely holding steady.
Read Also: What’s A Conventional Mortgage
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Why Lenders Dont Like Providing Small Mortgage Loans
So why is it so difficult to find a lender offering small mortgage loans under $50,000 in the first place? Generally, its just not worth it to the bank .
Thats because whether your mortgage is for $50k or $500k, loan origination and servicing costs are about the same. A loan of several hundred thousand dollars over couple of decades provides the lender a nice profit from interest, while a much smaller loan requiring the same amount of money and effort to fund it yields significantly less. Often, its not cost-effective for a bank to provide such a small home loan.
If lenders lose money providing extremely small home loans, they are certainly not going to go out of their way to advertise their availability, much less the higher rates associated with these loans. That does not mean, however, that there are no lenders out there who will provide one.
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Sort Your Paperwork To Speed Things Up
Lenders need proof of your income before they can offer mortgages, so it makes sense to get your paperwork together in advance. Sending all the paperwork in one batch speeds up the process as it reduces the chances of your application being reviewed by more people.
If your lender won’t accept PDFs, uploads or printed internet bank statements, you may need your bank to send you original copies. Ask for these a few weeks in advance in case you need to wait for the originals to arrive.
Your lender may want to see any or all of:
Your Down Payment Is Too Small
Finally, lenders want you to have some skin in the game. Specifically, they want to make sure you’re contributing a down payment. This means you’re putting your own money on the line, and it reduces your loan-to-value ratio .
In general, if you borrow more than 80% of the value of your home, lenders are going to charge private mortgage insurance to protect themselves from losses. Otherwise, it could be hard for them to sell your home for enough to pay off the loan and all costs if you default. If you’ve made a 20% down payment, though, there should be plenty of equity in the home, and lenders should have no trouble getting their money back if they must foreclose.
While lenders generally require PMI, most won’t deny you a loan if you have less than 20% down. In fact, it’s possible to get some home loans with just a 3% or 3.5% down payment . Still, if you want to put either very little or no money down, many lenders won’t be willing to give you a loan for 100% of your new home’s value — especially if your credit and other financial credentials are imperfect.
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Mortgage Requirements Are Loosening
Theres good news for home buyers: Its finally getting easier to get a mortgage loan.
After tightening their lending standards during the pandemic, it seems mortgage lenders are starting to loosen the reins a bit.
In fact, according to the Mortgage Bankers Association, mortgages were about 2.2% easier to come by in April than in March. And on some types of loans? Mortgage availability was up as much as 12.6%.
Heres what the change means for home buyers .
Borrowers Should Pay Attention To Their Credit
Experts are unsure when well get back to pre-pandemic lending, which saw increasingly looser requirements leading up to February 2020. This means people who want to buy a home or refinance their existing mortgage should pay close attention to their credit score, with the FICO score being the most often used credit score by lenders.
Your FICO score is the leading indicator of creditworthiness among lenders. Everyone has long been entitled to one free credit report from each of the three credit bureaus annually. Those free reports are now available weekly through April 21, 2021. Your FICO score is not included in that report, but many credit card companies, banks and credit unions will provide their customers with their credit score free of charge.
Heres what you should do to make sure your credit isnt holding you back from getting a mortgage:
Heres how your FICO score is calculated by credit category:
- Payment history35%
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