If you have applied for a mortgage recently, you know how onerous this once-breezy task has become. Ah, "zero down" and "instant, online approval" — those were the days.
Then again, the ease with which mortgages were obtained until 2008 also helped fuel the U.S. housing crisis. Now, nearly a quarter of the people who apply for home loans are denied, the Federal Reserve says.
Thinking about buying? You may be in for a rude awakening that includes mountains of documents to prove your financial suitability, plus sometimes-invasive questions from your would-be lender — "Say, who is this Uncle Johnny guy who gave you $2,000 for your birthday? Was that a loan?"
Here are 10 factors that can put your mortgage hunt in jeopardy or kill it outright. If you're about to go house hunting, know these well and, if possible, try to avoid them.
1. You're self-employed
Being your own boss lets dictate your day and work when you want. Nice. But it also creates two major issues for lenders, says Todd Huettner, a mortgage broker and head of Huettner Capital in Denver.
The income you earn from owning your own business can arrive in gushes or trickles, compared with the steady, reliable pay from a salaried job. Those fluctuations can create a higher apparent risk of default in lenders' eyes, Huettner says.
"Also, documenting small-business income is more difficult (for a mortgage company) than simply looking at a base salary," he says.
Lenders often require at least two years of tax returns to judge the income of a self-employed borrower. Then, they stick with the most conservative calculations when crunching the numbers.
Bonuses and commissions also fall into a similar category of wage "variability" and are equally challenging to document.
2. You have a subpar credit score
The average U.S. credit score is now 750, up from 720 a few years ago, according to a study earlier this year by credit reporting agency Experian. It's higher in some areas, too, as consumers have become far more careful about their money amid the recent lean times.
"Technically, you can get a loan with a credit score under 620, but you won't want it, Huettner says. "The rate and fees will be very high."
Most lenders, he says, require a credit score of 640 or higher to give you the money you need for your home purchase.
But, if other factors are favorable — such as a high, documented income and a long track record of paying your bills on time — some Federal Housing Administration-approved lenders will allow mortgages for consumers with credit scores of as low as 580, says Mike Premny, owner of Icon Capital Group Inc., a mortgage brokerage in San Francisco.
3. You have little money for a down payment
Compared with past years, lenders are asking buyers to put more money down in relation to the amount of the loan. If you don't have enough cash or cannot qualify for down-payment assistance, you may look risky to lenders and they may turn you down.
The down payment doesn't necessarily have to be 15% to 20% of the home's value, as many consumers seem to believe these days, Huettner says. For example, you can still buy a primary residence with an FHA loan with only 3.5% down, if you qualify, and you can secure a standard loan through a Fannie Mae or Freddie Mac program with just 5% down, he says.
"The difference (with putting less money down) is you will now pay higher mortgage-insurance rates and have to have higher credit scores than you used to need," he says.
4. You're new to the housing market
Squeezing into the market is trickier now for folks who have never owned or rented a home. Most lenders require all borrowers to have at least a two-year housing history, Premny says. This can include verifiable rent payments.
"In cases where the borrower is a newly graduated student, (a rental history) may not be required," Premny says. "First-time borrowers are often required to pass a 'rental shock' formula; if a young consumer's projected new mortgage payment is too much higher than their present housing payment, it may create an issue."
Typically, buyers must at least be able to document 12 consecutive months of rent payments to get a loan, Huettner says.
"If you lived rent-free with a family member, this requirement is waived," he says.
This tighter rule could be affecting the market. The National Association of Realtors says first-time buyers accounted for 32% of all buyers in the third quarter of this year. Historically, they comprise about 40% of buyers.
5. You are a new employee
These days, most lenders ask potential homebuyers to show at least a two-year employment history in the same field of work before they'll write a loan, Premny says. Mortgage companies simply can't ignore the high unemployment rates that have dogged much of the country for four or five years.
People re-entering the workforce must have a job for six months to use that income to qualify for a loan, Huettner says. Technically, if you are a full-time, W-2 employee with a verifiable base salary or hourly income, you need only one pay stub to obtain a mortgage. But in reality, "gaps in employment can be problematic," he says.
If you graduated recently and have a job in your field of study, lenders generally will waive that requirement, Huettner says.
6. Your income isn't high enough
If your monthly debt payments make up 45% of your gross monthly income, some lenders may see you as a worthwhile risk and write you a mortgage. Any extra debt, however, will likely take you out of the running, experts say.
"A debt-to-income ratio of 45% is really the highest threshold for approval for most borrowers," says Atlanta-based Gary Parkes, vice president of mortgage lending at Guaranteed Rate.
Lenders may breathe easier about grabbing you as a customer if your debt ratio is below 40%, Parkes says. But if you have other positive factors — such as a long, stable work history, a high credit score and lots of money for a down payment, "getting a loan approval (at) up to 45% is possible," Parkes says.
7. You've applied too often
Borrowers in distress typically contact many lenders, thinking it takes just one company for mortgage approval. But how many is too many? Numerous loan applications can pull down a credit score, experts say.
"Multiple credit inquiries for mortgage shopping are not supposed to count against you if they are done within a week or two of each other," Huettner says. "Less than five inquiries should not have a huge impact." The problem, he says, is that even for someone with a credit score of 740, losing a single point "can make the difference in cost or even getting a loan."
"First and foremost," Parkes says, "borrowers should try and get a referral to a mortgage professional that a friend, family member or colleague has used and been pleased with."
He offers a different limit when it comes to mortgage shopping: "It is recommended that you contact no more than three potential lenders at one time."
8. You have too much debt
Your bills truly add up when lenders are giving you a close look. Auto payments, credit cards and student loans all can reduce your odds of obtaining a mortgage, depending on how much you owe, experts say.
Even if your student loans are in deferment, those balances aren't always removed from your debt-to-income ratio. Fannie Mae and Freddie Mac guidelines, for example, do not exclude deferred student loans, Parkes says.
"An FHA loan might allow for the exclusion of the monthly (student loan) obligation, provided there is sufficient proof that the deferment will be for at least one year after closing," he says.
Meanwhile, payments that you receive for child support or alimony can offset your debt load, if you can prove they will continue for at least three years, Parkes says.
9. You just bought a car — or something big
Beware of those large, last-minute purchases before or during the loan-approval process.
"It is important to keep your credit history as stable as possible during the time following application until closing," Parkes says. "A borrower's credit report will be repulled anywhere from the day of closing to 15 days prior to confirm that there has been no substantial change to the credit profile since the time of application. Changes to the credit report can impact closing."
This is one of the more common mistakes consumers make when house-hunting, Huettner says.
"Don't apply for any new credit, don't let anyone pull your credit and don't make any large purchases without speaking to your lender first," Huettner says. "Any new credit inquiry, large balance increase or new account will have to be explained and documented."
10. You picked the wrong bank
The lender you choose for your potential home purchase can make a large difference in the process, some experts say. Big national banks may scrutinize you more.
On the other hand: "A local mortgage company will typically have access to many national investors and their guidelines and can determine the one that best suits your needs," Parkes says. "If you go to one large national bank, you are typically bound by their guidelines only."
Still, different banks, no matter their size, have different rules on lending criteria, Huettner says.
Source: MSN Real Estate, article by Bill Briggs of SwitchYard Media
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