Dealing with Common Problems In Mortgage Approval
The ideal borrower has a good credit rating, can make a substantial downpayment, can prove good income, has few debts and liabilities and shows stability. Problems and obstacles come about when any of these conditions cannot be met by the borrower.
However, these are common issues faced often by both the mortgage lenders and the borrowers, and there are solutions.
1) Credit Blemishes
- If you have had problems with creditors in the past and resulting nonpayments, late payments or delinquent accounts then you really cannot escape the consequences for very long. Mortgage lenders pull your credit report to evaluate your credit worthiness. They will see these negative remarks and will be reluctant to approve you for the loan.
- If this could happen to you take action as soon as possible. There are ways to improve your credit score. But these methods take some time. So act sooner than later.
- Do not try to hide facts from the lender because he will find out eventually. It is better to be up front with the mortgage lender and give an explanation for the credits lapses in the past if such reasons exist. Many lenders understand that situations beyond control such as loss of job or serious illness can result in problems with the credit history.
- Ask your lender upfront if the entries on your credit file are going to interfere with your mortgage application and which entries you need to be dealt with to have a better chance of loan approval. This direct feedback from the lender will tell you what issues you need to address.
- Seek alternate lenders. You will not have much luck finding lenders that dealing with subprime mortgage in today’s market conditions. Most of the lenders that dealt with subprime borrowers closed shop many years back when the meltdown in the real estate industry began.
These contenders were known as B paper lenders and are more or less missing from the current market. The price that you have to pay to get approved for a mortgage loan in spite of having a less than shiny credit is that you pay a higher interest rate on your mortgage and maybe even higher origination and closing costs. Read more about bad credit / sub-prime mortgage.
- Use a mortgage broker. Mortgage brokers are usually in the know how of many lenders and depending upon your need and requirement can match you with the right lender, which in this situation would mean a lender with less stringent underwriting guidelines.
- Get a cosigner for your mortgage application who has a strong credit history and rating.
2) Fixer uppers and cooperative apartments.
Its just difficult to get a loan to buy a co-operative apartment. The reason lies in the complicity of the deed. Read in great detail about co-operative apartments and why they are different from standard mortgages.
Fixer uppers of properties that require major repairs or improvements before they can be considered safe for habitation. Major repairs could include an old foundation that needs repairs, old electrical wiring, plumbing replacement of the roof etc.
If the necessary corrective work exceeds 3% of the property value which is always the case with the major fixer-upper, getting a mortgage loan is a problem.
In all probability the lender will give you two separate loans. One for buying the property and another construction loan to make the necessary repairs and improvements.
3) Low appraisal
Another problem that can arise with your mortgage approval process is when the appraisal of the home comes in too low. You may have the income to afford the mortgage and your credit may be blemish free. But if the appraiser says that the loan amount you are borrowing is too much and that the property is really not worth that amount, your mortgage application may get rejected.
The reason is simple. For the lender, the home is the collateral. He is going to sell it to recover the money he lent you incase you ever default in the future. If the value is less than what you are borrowing, then he is already at a higher risk.
There are many reasons why a home may get appraised for a lower price than you thought.
- You overpaid. It can actually happen that overpaid because you liked the house. The amount that you are wiling to pay may have very little to do with the actual market value. You may be willing to go steep for your dream house but that doesn’t meant anybody else will.
You have no option but to ask the seller to reduce the asking price. If the seller doesn’t agree move on without wasting your valuable time. You may also consider getting another real estate agent specially if you suspect that the present agent was deliberately trying to inflate the value of the property to increases his commission. A good agent’s negotiating skills and knowledge of the property rates can save you thousands of dollars whereas an incompetent and unethical agent can cost you that many extra.
- The home you are buying is located in a declining market. After the decline in the real estate housing sector, certain areas were more badly hit than others. Lenders put certain restrictions on mortgages in areas where the rates of the properties declined more dramatically. If your house belongs to such an area you might have to pay a higher rate of interest on a mortgage and be willing to make a larger down payment.
A mortgage lender may make an exception to your dream home if your appraisal can demonstrate conclusively that the property values are not falling within the geographic area where your house is located.
- The appraiser does not know the property values in your area. It is quite possible that the appraiser that has been hired by the mortgage lender is un-aware of the market trend in your locality.
This is especially true if the appraiser is from out of town. Many times the mortgage lenders hire professionals operating companies which may send their trained appraisers from their head office. For example, you decided upon the price that you wanted to pay based on the sale of comparable houses in the neighbourhood. But the appraiser valued the property lower because he was not aware of the neighborhood property rates.
If this happens to you, request a copy of the appraisal from the mortgage lender. View what houses and sales he has taken in to consideration. If he has not made valid comparisons, you can point it out to the lender and show your concern. In such a case, some lenders might be willing to get a second appraisal at no extra cost although you should know that this is rare. It is difficult to get the lender to agree to a free second appraisal specially if the appraiser is someone the lender has been working with in the past and has confidence in his evaluation.
- The lender could be redlining. Redlining is the practice where the lender discriminates against a certain area or locality and does not give out loans for that area. This practice is illegal and so not very likely the reason for a low appraisal.
However, if you do suspect that this could be the issue ask for a copy of the appraisal report. See if the appraisal is based on a realistic estimation of sales in your locality or not. If you find that the appraisal report does not reflect the current trend of property in your area you can ask the lender for an explanation. If you do not get a satisfactory response you can ask for a full refund of your loan application and appraisal fee and move your business to another mortgage lender. You can even consider filing a complaint with the appropriate agency in state that regulates mortgage lenders.
4) High Debt To Income Ratio
A lender can deny you a home loan if he feels that your debt to income ratio is already too high. Even though you feel that you are ready to take on the additional loan, when the lender tells you that you have way too much debt already, it might be time to take a closer look at your current liabilities.
Remember that the monthly payments on a home loan create a substantial financial burden. If you have not planned for it, it can interfere with your ability to maintain a certain lifestyle.
Here are some ways in which you can resolve the problem of having too much debt.
- Paydown the long-term loans. You can consider paying off some of your existing loans such as automobile loans and student loan. Paying off your existing loans will help in reducing your debt to income ratio. You should discuss this with your mortgage lender because typically the loans that have less than 10 months remaining on it are not considered as long-term notes.
Fannie Mae and Freddie Mac prefer to have the payments on long-term debts not to exceed 40 to 45% of your gross monthly income.
- Cut down on your lifestyle expenses. If you are stretching your financial resources to the limit already with the current lifestyle that you have you have 2 options that you can implement. You can somehow increase your income or cut down on the frivolous and nonessential expenses.
- Take help from friends and family. If you have friends and family who are ready to boost your finances when you’re applying for markets such as giving you money for down payment or even having an equity share in the home, to not feel shy or too proud to ask for such help. Many times the close family and friends will be more than happy to help you out. It is also not too uncommon to have your parents or close family cosigned on your mortgage application.
However there are ramifications for the cosigner. In case you are late on your payments in the future or for some reason cannot meet their mortgage obligations anymore the cosigner can be held responsible but the lender to make the payment. This could mean financial burden and even a financial emergency for the cosigners.
You should discuss these aspects in detail with the person who you’re asking to cosign on your mortgage application and make sure that they are aware of every aspect and responsibility that they are undertaking.
5) Insufficient income
If you are having problems with getting qualified for mortgage because your income is deemed to be insufficient then there are a few steps that you can take to deal with this problem.
Your mortgage lender is trying to tell you that with your current amount of income you will most likely face severe financial stress if you take on this mortgage loan. Before you get upset with this think about the problem carefully. It may be possible that you have not calculated your financial obligations carefully.
If this is the case then it is time to go back to the calculations. Maybe you are not ready to borrow on a mortgage loan just yet and should wait for another couple of years until your business is doing better or you have got that promotion with the added salary raise.
- Larger downpayment. However, if you still feel confident that you can safely afford the mortgage with your existing income then you can increase the down payment if you are cash rich. Many lenders have less restrictive income requirements for applicants making more than 25% downpayment.
- Get a company-borrower. Mortgage lenders usually like to have more than one borrower sign on a contract and take the joint incomes of both the people signing for the loan into consideration. So if you cannot qualify for the mortgage loan all by yourself you may be able to do so if you get the parents or spouse to cosign with you on your mortgage application.