Northern Kentucky Real Estate Blog

If you read my blog or know me, you’ve probably heard me say recently that the biggest hurdle to get the now stabilized housing market headed back in the right direction is getting buyers financed.  According to a recent survey by the Federal Reserve, 75% of Lending institutions have tightened their loan qualification standards in the last 6 months. That’s up from about 60% in the previous survey.

Here are the top  reasons  banks are denying home loan request, based on the buyer.

via RisMedia.

1. Poor credit: It’s all about your credit score in today’s market. Different lenders have different credit score requirements but you can bet that if your score is below their pre-determined minimum your loan will be rejected. Even FHA (Federal Housing Administration) loans, which have traditionally catered to borrowers with lower FICO scores, have an average borrower credit score of 693, according to CNN Money, which is above the national average.

2. Insufficient liquidity: The more downpayment the better. Even with traditionally “low” downpayment loans the minimums for cash reserves have increased significantly.  If the borrower doesn’t have strong track record of having the required amount of cash on hand for the required downpayment the loan may be rejected. The options of “getting” the downpayment from Gandpaw have been severally limited.

3. Lack of income: applicants must be to have consistent proof of income for the last two to five years. Used be if your credit score was 800 or above, you could get by with a even a cloudy employment history.  A copy of couple years tax returns with a great credit score was all you needed to get loan approval, regardless of you employment history.  In today’s market, your employment verification is one of the key requirements to getting loan approval. Additionally, any discrepancies from your actual employment verification and what you told the lender on the application will be red flagged in the underwriting department.

4. Lying on the application: Stretching the truth on any part of an application will be a sure loan rejection. Unfortunately, it may come with some expense. Your loan probably won’t be rejected until it’s in underwriting and that’s usually 3-5 days before the anticipated closing. At this point you will have spent money on application fees, appraisals, home inspections, deposit for the movers, and the list goes on.  You could easily have $1,500 invested only to learn in the eleventh hours that your loan is rejected and there will be no closing.

5. Debt: Borrower has excessive debt and their debt-to-income ratio exceeds the bank’s guidelines. Simply make sure your with the lenders guidelines. A rules of thumb is front end ratio: 28% of your gross income is to be used for you new house payment, including real estate taxes and homeowners insurance. No more than 36% of your gross income can be used totally debt after your new home purchase.

6. Unemployment: Most lenders will like to see at least two years of stable work to issue loan approval. Also, one of the questions on the employment verification is “ Chance of continued employment”. If your employer reports anything less than 100% you may (will) have a problem.

7. Self employment: Lenders are looking at self-employed applicants with a lot more scrutiny these days, making it very tough for these borrowers to get approved. The only thing I can add here is Documentation in key. If your “books” and tax returns are professionally formatted you stand a much better chance of being approved. If your books and tax returns are penciled in I don’t care how much income your reporting, you will probably have difficulty getting approved. At least expect an extra 30 days, a couple hundred phone calls, copies, more copies, more copies of the things you copied 2 weeks ago and a few headaches.

The other side to the story is the reasons why the loans are being denied for “property” problems.  The once commonly used idea of buying a fixer-upper and poring some sweat equity into a property for a nice investment has become more difficult than ever before.   Just because your loan officer says your qualified for $175,000 with your $25,000 down payment does not necessarily mean you can buy any property listed for $200,000 or under.  The property must also meet the banks approval. Know your options and limitations before wasting valuable time and spending  money on something that is a long shot.

There is no such thing as a “slam dunk” loan approval in todays market. Even the most qualified buyers are experiencing difficulties that even loan officers are not able to predict.