Part I of a II-Part Series
SPECIAL TO THE MIRROR
The lending industry has changed dramatically over the past few years. Standards and practices that had long been widely accepted are now totally transformed. Gone are the days of careless or loose loan underwriting approvals.
Banks have tightened their standards to an extreme degree to assure they don’t make the same mistakes again. Government regulations that affect all financial institutions and have increased consumer protection have resulted in a sharp increase in lending standards, which in turn, has led to borrowers being denied for real estate loans at an alarming rate.
Here are some of the main reasons banks are declining home loan requests:
A borrower may have a sufficient down payment and adequate income, but if their credit score in below a certain threshold, obtaining a new loan or re-financing from a traditional bank will be difficult.
Also, lenders have begun to re-check credit reports even after a loan has been approved. For example, if a borrower purchases a car or any significant item before the home loan has been funded, it may well impact their credit score. These could even include ordering new furniture for the new house. Even a tiny drop in rating could result in a buyer being required to substantially increase their down payment.
Insufficient Documented Income
Regardless of how good one’s credit score is or how much money they may have in bank or brokerage accounts, if they cannot show sufficient income for at least the past two years, loan approval will be difficult. For example, if someone has recently retired or does not show their full income on their tax returns, they will need a much larger down payment.
Lenders are scrutinizing self-employed applicants today, making it very challenging for these borrowers to obtain loan approval. For example, if someone’s business is structured as a partnership of any type, lenders will require personal and financial details from all of the partners in the home loan process.
Insufficient Down Payment: If a borrower does not have sufficient liquid assets, banks will not approve financing.
If a borrower already has a substantial amount of debt, and their income is not high enough to meet the bank debt-to-income ratio guidelines, they will not be able to obtain a loan.
Issues Regarding the Appraisal Process
Appraisers used to be hired by the loan broker and were in direct communication with both the lender and real estate agents involved. Due to the new government regulations, appraisers are often unfamiliar with the neighborhood and do not receive helpful information about the property value from the real estate agent. As a result, their appraisal frequently is at a lower value than the buyer and seller have agreed to in the purchase contract.
Another complicating factor has been occurring more frequently when the bank underwriter reviews the appraisal file. The underwriter may decide to disagree with the appraisers’ evaluations.
Obviously many of the new standards were intended to improve the loan industry and our economy. However, home buyers frequently are encountering obstacles that have prevented them from purchasing when it would objectively be reasonable for them to make the purchase. Also, with the strict underwriting guidelines banks have imposed, the time required to obtain loan approval is substantially greater. The process that used to take fifteen to twenty days now generally requires at least thirty days, and extra time being needed beyond that in many cases.
“How to Successfully Obtain Home Loans” is the focus of part two of this series.
Michael Edlen, an agent with Coldwell Banker, can be reached at 310.230.7373 or [email protected]