Why is it so difficult to get a mortgage now?

Posted by  on Jun 18, 2012

Unless your application package is extremely solid (for example you're putting down 50 percent to buy your new home, you have been with the same employer for ten years, and possess very high credit scores), you won't get a mortgage with your good looks and a pay stub today, the way you could have in 2006.

In addition, unless your financial position and credit rating are extremely bad or extremely good (making your mortgage prospects pretty obvious), home loan approval may seem like a crap-shoot. Douglas Benner, a senior loan officer with Embrace Home Loans, in a recent Washington Times interview put it this way: "It goes both ways. Some people think they cannot get a loan when they can, and others still think they can get a loan without providing any documentation. People need to realize that they will need to jump through a lot of hoops to get a loan now, especially compared to five years ago."

Fannie and Freddie

To make things even more confusing, there are guidelines and then there are guidelines. According to Fannie Mae's Loan Level Pricing Adjustment Matrix, you could qualify for a mortgage with 3 percent down and credit scores lower than 620 (you'll pay an extra 3.5 percent in fees for the privilege). But if you put less than 20 percent down, you have to be approved by a mortgage insurer and pay for mortgage insurance. And guess what? Those folks want to see credit scores of at least 680 to 740 because they are the ones taking on the risk.

What about FHA?

If you read the news you have probably seen articles that claim FHA allows 90 percent financing with credit scores as low as 500, and 96.5 percent for those with credit scores as low as 580. And if you look online you will find plenty of mortgage brokers trolling the forums, all asking the same question: Where can I find an FHA lender that will actually approve one of these deals? They are rate as hen's teeth.

Because while FHA allows lenders to make these loans, if too many go south the lenders will get their approval to originate FHA loans yanked. So the lenders protect themselves by imposing credit score requirements of 620, 640, or 660. In fact, the average credit score for those who actually get approved for an FHA mortgage is just under 700!

So how do you know if you can get a mortgage?

The easiest way to to get your information together -- income, assets, and debts -- and be very precise about it. Get copies of your actual bank statements, all pages (hopefully there are no bounced checks on them) and a couple of actual pay stubs (or tax returns and a P and L for you self-employed folks). you can get your credit reports for free from www. annualcreditreport.com and it's not a bad idea to pay for your scores as well.

Armed with all of this, find a lender that will underwrite your application electronically and give you a preliminary decision right there. Then you know if you have more work to do or can easily close your loan when you are ready.


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