Those easy mortgages of the housing bubble days are over. Here are five ways to make sure you get the loan you need to buy your dream house.
If you’re planning to shop for a house, there’s good news and bad news.
The good news is that home prices are relatively low – an absolute bargain in some parts of the country, especially those hardest hit by the foreclosure crisis. In addition, finding the lowest rates on mortgages takes a fraction of the time it used to take, thanks to mortgage search engines like the one we have here.
The bad news is that mortgage money isn’t easy to come by. Then again, with the exception of the heady bubble days, it never was.
According to Carolyn Kemp of the Mortgage Bankers Association, 63% of mortgage applications in 2007 resulted in loans. That number dropped to 55% in 2008. In the first half of 2009 (the latest data available) the number of applications that became loans had risen to 65%. Not all failed applications indicate a loan rejection – some represent deals that fell apart for other reasons. Nonetheless, these numbers suggest that a lot of people are unsuccessful when it comes to borrowing for a house.
Watch the following recent news story that offers three common reasons for rejection, then get more details below.
Following are five tips to make sure your mortgage loan gets approved.
Make sure your income is documented
Long gone are the days of the “no-doc” (no documentation) loan. Submit a mortgage application today and you’ll be subject to income scrutiny: You’ll need to prove your income by providing tax returns for at least the last two or three years. In addition to documenting adequate income, your tax returns will be used to verify that your earnings are consistent and that you’ve been working in the same job for at least two years – the longer the better.
Mortgage borrowers often mistakenly downplay the importance of income, especially if they’re fortunate enough to have a big bank balance and/or a high credit score. While that may have been enough at the height of the housing bubble, it’s not so today. Even if you have millions in cash, a lender has no assurance that you won’t head to Vegas the day after closing and lose it all. And your credit score, while certainly important (more on that below), is merely a snapshot of your credit-worthiness at one point – it could change next week.
At the end of the day, your income supports your mortgage loan, so count on the lender verifying both the amount and the consistency. Translation? If it’s not on your tax return, you didn’t earn it.
Shine up your credit history and score
In pre-crash days, a 720 FICO credit score put you in same borrowing tier as someone with a perfect 850. These days, some lenders require a 740 for the best rates and terms.
A common mistake by novice home shoppers is to start looking for a house before checking their credit scores and credit history. Problems or mistakes that lower your credit score could take weeks to rectify – not the kind of problem you want after making an offer on a house. The proper sequence of events for buying a house?
- Check your credit history (get a free copy at annualcreditreport.com) and credit score (pay FICO or another score provider.)
- Get pre-approved (not just pre-qualified) by a mortgage lender.
- Start looking at houses.
If you’d like some advice on cleaning up your credit score, check out Three Ways to Improve Any Credit Score
Buy the right property
There are some properties that lenders won’t accept as collateral for a mortgage loan. For example, in December 2009, HUD put out a series of new rules regarding what condominium projects are eligible for FHA-insured financing. (FHA insures approximately 25% of all mortgages.) Some of the restrictions: 50% of the units must be owner-occupied, not more than 10% of the units can be owned by one person, no more than 15% of the owners can be delinquent on their homeowners association dues, at least 70% of the units must be sold and the entire project has to show up on FHA’s approved list of condominiums.
And when it comes to investment properties or second homes, lenders are also likely to have stricter lending standards than they did in the “bubble” days, as well as require bigger down payments.
Get the right appraiser
A house must have a sufficient appraised value to be used as collateral for a mortgage loan. Therefore the knowledge and experience of the person providing that appraisal is critical.
In May 2009, a new Home Valuation Code of Conduct went into effect that provides new, stricter rules for both lenders and home appraisers. (We first starting reporting on the proposed changes back in 2008: See Reappraising Appraisers.)
The new rules say lenders can’t “cherry pick” appraisers, hiring only those who are willing to return an appraised value that would facilitate a loan. Today’s appraisers aren’t selected by the lenders, but by an outside, unrelated company. While noble in thought, the new rules could have unintended consequences – for example, appraisers that aren’t as experienced, don’t pick proper “comps” (comparable properties) or otherwise simply aren’t as good at determining a home’s true market value.
In the bubble days, high-ball appraisals were ultimately made accurate by rising prices, so appraisers could afford to be generous. Today, in many places prices are falling. That makes appraisers more cautious, thus more likely to err on the low side.
Solution? Although you can’t pick or influence an appraiser, you can at least try to make sure a genuine, on-premises appraisal with adequate comps is done by an experienced professional rather than a drive-by or “desk appraisal” by a novice.
Work with the right mortgage professional
When you pick service professionals, from doctors to plumbers, you interview several before choosing one, because you realize that some will be smarter, more experienced, more customer-oriented and more likely to produce a favorable outcome than others.
Experienced borrowers extend that same logic to mortgage brokers and loan officers.
While it may appear that a loan is a loan, how a loan is packaged, structured and presented to lenders can make the difference between approval and rejection. The loan officer or mortgage broker you choose should be experienced and knowledgeable enough to give you objective advice on everything from the type of loan that best suits your needs to how to improve your credit score. A broker (someone who works with more than one lender) should also know which lender is most likely to approve your loan.
In short, who represents you in the mortgage process can determine success or failure. Ask about licensing (a must) as well as about experience and education.
Be aware that, compared with a few years ago, mortgage brokers are getting harder to find: Check out Death of the Mortgage Broker?
Bottom line? Being a successful borrower is like being successful in most endeavors. It requires understanding how the game is played, putting your best foot forward and working with professionals who know what they’re doing.