Loan Qualification Standards - "Loanbusters"

This is definitely not a "Who you gonna call?"

I've done a couple articles on the two ratios, debt to income and loan to value. These are the basic and most important parts of loan qualification. Nonetheless, there exist a plethora of reasons why someone can be turned down for a loan even though they make it on the ratios.

The first of these is time in line of work. "A paper" from Fannie Mae and Freddie Mac looks for two years in the exact same line of work. One change that trips a lot of people is going from being employed by a company to being self employed in the same line of work. Believe it or not, a promotion can also sink a loan if your job title changed, for instance from salesperson to sales manager. If it was with the same company, it can sometimes be okay, but if you changed companies to get the promotion, that's a really tough loan. Subprime loans will accept shorter time periods, but real subprime is almost nonexistent today.

Making payments on time is probably the most common deal buster for A paper. In general, you are allowed no more than one mortgage late, or no more than two other lates within the last two years, a late being defined as thirty days or more delinquent. The reason does not matter. It does not matter how justified you were in not paying. The fact remains that you are reported as being late. The only way to remove these reports is for the company to admit it was in error in reporting you late. Many people will not pay the charge as it gets marked later and later and later. This is self defeating. Pay it now, dispute it afterwards. Yes, it's harder to get your money back - but the money it saves you on your home loan is typically much larger.

Store credit cards are one of the biggest headaches here. If you buy merchandise with a generic credit card, you've got the card company, who are neutral, looking at the transaction. Both you and the merchant are their customers, and the merchant needs to take credit cards. They're not going to quit taking them. If you use your store credit card, the dispute department is pretty much guaranteed to take the view that you bought that merchandise at their store and therefore you owe the money. I run across five or six store card problems for every generic card problem I encounter.

Bankruptcy is another deal buster. People in Chapter 13, or just out of Chapter 7. Most banks won't touch them. It's not really rational, but you there you are. Some lender are fine with them, however. This is one place where going to a broker or a correspondent is likely to save you, because they know what lenders will take a Chapter 7. (Chapter 13 is almost certain to kill you via late payments, disqualifying you from A paper)

Reserves can be a deal buster. There actually is a reserves requirement for regular full documentation A paper, but it's pretty much a non-issue as responsible people get uncomfortable if they can't lay hands on a month's mortgage payment. Reserves were really an issue for stated income loans when we had stated income loans. A paper stated income required six months PITI reserves somewhere that you can get to it. Subprime is less demanding, but if you don't have the lender's requirements, you won't get the loan. Would you loan hundreds of thousands of dollars to someone with absolutely no cash in the bank? Payment shock, where your monthly cost of housing is increasing, can increase the reserve requirements. You were paying $1200 per month for housing, now you'll be paying $2000. That takes some adjustments to lifestyle, and some people take a while to adjust.

Related Party Transfers are another questionable point. All of the background for loans assumes that the transaction is between unrelated parties, who have no reason to cooperate in order to do the lender dirt. If you're buying the house from your brother or some other family member, that assumption goes out the window. Ditto between partners and their partnerships, and so on. Some lenders will do them, others won't. Some will but charge extra. Others will but have special requirements. Whatever they are, you have to meet them.

The appraisal coming in low is another. The lender evaluates the property on a "lower of cost or market" basis. The Appraisal is the "market" part of that, and the lender will only loan money based upon the lower of these two methods of evaluation. I have people tell me all the time that their new purchase is worth $20,000 more than the appraised value (or the purchase price). No it isn't. By definition - it's worth what a willing buyer and a willing seller agree upon. The bank's evaluations are necessarily conservative, and they don't want to take over the property. They're not in that business. They want you to pay back the loan. That's the business they're in.

Late payments. Whatever you do, while the loan is in progress, keep making all your payments on time. Whether just indirectly due to the credit score dropping, or directly because now you've got a(nother) thirty day mortgage late, this can raise your rate or even break the loan.

Sourcing and seasoning of funds to close. Just because you've got $100,000 in the bank doesn't mean the bank is happy. Nobody rational keeps that kind of money outside of investment accounts. At least nobody rational who needs a loan - Bill Gates might. Lots of folks attempt to hide loans that way. The bank is going to what to see that you've had it a while (seasoning) or prove where you got it from (sourcing). If you really just got $400,000 from the sale of a previous property, you're going to have the escrow papers and HUD 1.

Final credit check: I have a set spiel I go through, "Until this loan is funded and recorded, don't breathe different without getting my okay. Make the payments you've been making. Make them on time. Don't take out any new credit. Don't allow anyone (other than mortgage providers!) to run your credit. Just before the loan gets recorded, the lender will pull a final credit report. Woe be unto the person whose situation has deteriorated, and it means we'll have to start all over again, if there even is a loan that makes sense."

Failures of verification. Three biggies here: employment, rent or mortgage, and deposit. I do not know why people bother lying, but they do. Don't you be one of them. World of hurt if the lender wants to prove a point. Don't quit your job, don't change anything about your employment. I once had a guy quit to become an independent contractor two days before the loan due to be was funded. Guess what? No loan.

Lines of credit/credit history/no credit score: Most lenders want to see at least 3 lines of credit with a 24 month history of making payments on time. Freezing your credit cards in ice is a wonderful idea, but you need to use them to demonstrate a payment history. Once per month, I use mine for something small and stupid that I would otherwise pay cash for - just to show payment history (it also helps your credit score). Pay if off as soon as the bill gets there. Waivers for two lines of credit are fairly easy, but if a given bureau doesn't know you have two open lines of credit, they may not score your credit profile. If you don't have at least two credit scores among the big three - no loan.

Property is structurally unsound, is not certified for habitation, unsuitable or not zoned for intended use, etcetera. Wouldn't you really find out about this before you have a very large debt to pay? Okay, this can cost you money, but it's a "Thank (deity) I found out now!" moment. Finding out now means you can change your mind while it's still the seller's $400,000 problem, before it's your $400,000 problem.

So there you have them, most of the most common reasons why loans - and therefore real estate deals - fall through for people that are otherwise qualified.

Caveat Emptor

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