1.
) Loan-to-Value Ratio - Perhaps the most common problem in today's mortgage industry is a low loan-to-value ratio.
This is the percentage of the loan amount compared to the overall value of the property.
For example, if you currently have a balance on your first mortgage of $200,000 and the appraisal comes back with a value of $250,000 then your loan-to-value ratio (LTV) is 80 percent.
For a conventional loan, lenders require a minimum of 5 percent equity or a maximum LTV of 95 percent.
In addition, any loan over an 80 percent LTV requires private mortgage insurance (PMI).
Of course, the problem is that over the past 2 years many areas of the country have seen properties decline in value by 10 to 20 percent or more causing many homeowners to have a high LTV ratio.
Even if they are under 95 percent, many homeowners still find themselves having to settle for higher interest rates, PMI payments, or both.
That is why it is absolutely critical to know the appraised value of the home before applying for a mortgage.
The simple reason is that appraisals cost money.
Most lenders will charge $375-$425 for a basic single family appraisal and this cost is non-refundable.
So, if the value comes in lower than expected (and today many do!) the homeowner could risk losing their money and never being able to close on the loan.
So should you check Zillow? Yes, but don't rely on it 100 percent.
Recent statistics have shown that Zillow has been within 10 percent of appraised values less than 50% of the time.
In other words, 50% of the time Zillow is off by more than 10% and 24% of the time Zillow is off by more than 20%! Therefore, a crucial step for all homeowners to take before applying for a mortgage is to get an expert opinion of value from a real estate professional.
2.
) Credit Report - The second most common reason why mortgage applications get denied is a problem with the borrower's credit report.
A lot of attention is paid to the FICO score, which will need to be at least 620 with most lenders and over 720 to get the best interest rates.
However, more frequently and less obvious are issues regarding open collection accounts.
The scary part is that most of the time, people do not even know they exist.
Very often medical collections show up on credit reports without the applicant having ever been notified by the medical company or their insurance company.
The balance of a medical bill will simply be sold to a collector who will immediately contact all 3 credit bureaus.
These days, collection companies are so busy that they can go months and even years before contacting you about the account.
Needless to say, it is a critical step to have your credit report checked before applying for a mortgage.
Lenders will require that all collection accounts be satisfied prior to closing and many times it could take months before an applicant is able to pay it off and get it removed from the credit bureaus.
Also, if there are any other issues such as late payments, liens, and high balances, it is best to take care of it ahead of time because lenders will not accept updated credit reports once they are pulled for an application.
Should I get a copy of my free credit report online? Yes, but the scores that are gotten from Freecreditreport.
com and other online services are often not the same as the report used by lenders.
It makes most sense to have an actual lender get an updated report directly from the 3 credit bureaus.
For your security, remember to never send your social security number over the internet.
3.
) Debt-to-Income Ratio - The third most common reason why mortgage applications get denied is that the applicant's debt to income ratio (DTI) is too high.
The DTI is a simple calculation which begins by first taking the total of all applicants' gross monthly income before taxes.
For example, if a married couple makes $40,000 and $50,000, respectively, then their gross monthly income would be $7,500 ($90k/12).
The next step would be to add up all of the couple's monthly obligations.
Included in this number is the minimum payment on all credit cards, charge cards, home equity lines, student loans, car loans, and any other credit account.
Utilities such as cable, electric, gas, etc.
are not included.
Finally, you can add to this number the monthly escrow amount for taxes and insurance, and the principal and interest payment for your new mortgage.
This total expense number cannot be more than 45 percent of your gross monthly income.
4.
) Insufficient Reserves/Assets - Often overlooked, insufficient reserves can prove to be the difference between a closed loan and a denial.
What most people do not know is that most lenders will require at 2 months of reserves for loans with loan-to-value ratios over 80 percent.
This can be a substantial amount of money.
For example, if the loan amount is $300,000 the principal and interest portion of this, depending upon the interest rate, can be as much as $1,600.
You then have to add in the monthly escrows for taxes and insurance.
If taxes are $8,000 per year and the insurance premium is $700, that means the total payment is $2,325 and 2 months would be $4,650.
This amount would be needed over and above any funds required at closing - down payments, closing costs, escrows, etc.
5.
) "Subject To" Appraisal- Perhaps the most infuriated mortgage applicants are those that receive a "subject to" appraisal.
This means that the appraisal report and the value for the property is subject to certain conditions being completed, typically repairs to the property.
These days, ever detail of a property's appraisal is scrutinized and the repairs needed might seem trivial to a potential borrower, but many lenders will refuse to close on a loan until appraiser's conditions are met.
Sometimes, more stringent lenders (and often the ones with the lowest interest rates) can add additional conditions for an appraisal the appraiser did not even mention in the report.
These items can be anything from a hole in the roof to slight paint chipping on the exterior, to mold in the basement, or exposed electrical wires in the laundry, and everything in between.
The bottom line is, if there is anything about your home that can look skeptical to the untrained eye, chances are either the appraiser or lender will notice it.
Take a close look at every detail of your property BEFORE applying for a mortgage because it can be very costly and time consuming to correct during the application process.
The purpose of this article was to help clear up any misconceptions regarding today's mortgage industry.
It is well known that closing on a loan is more difficult today with more stringent underwriting guidelines.
Many loans that could have closed easily 5 years ago, are getting denied in today's market.
But, with the right information and knowledge before starting the mortgage process, an applicant can be better prepared for the road ahead.