If it seems like banks are getting tougher with loan approvals these days then you are correct. From talking to 6 underwriters in the past few weeks about the state of our lending environment, I wanted to share with you the top 5 reasons why loans are getting turned down. Almost everyone I talked to shared the same information with me and had the same concerns. I will definitely be using this inside information as a guide on all future loans that I work on.
So why are the banks geting tougher?
I have heard some people say that the banks don’t have enough money to lend or that there is a lack of liquidity in the markets, well let me dismiss that theory because that is not true at all. As you can see below the banks are more than flush with reserves and in fact should be lending a lot more money.
Unfortunately as more and more loan losses accumulate and they don’t show any signs of dissipating anytime soon, bank underwriting rulesthe are getting stricter across the board to prevent future losses on all new loans. It is because of this fear of future losses that all of the underwriters admitted that the pendulum has swung too far the other way. Here are the top 5 reasons why loans are getting turned down, they are in no particular order.
1. We don’t allow flipped properties
“Flipped properties” are homes that were bought in the past 90 days and are to be sold for a reasonable profit, most of the time these are bought by investors. Every underwriter admitted that they have to turn down this type of loan everyday. Each lender has a different set of rules for flipped properties, but unfortunately many of these loans get submitted to a bank that does not accept this type of loan. For example, even though the FHA eliminated their “90 day flip rule” recently, not all FHA lenders have followed suit and many still carry their own rules.
It is important to know which bank allows flipped properties within 90 days if a buyer is purchasing this type of property. Also it is important to note that if the property is being sold for more than a 20% profit, the buyer may have to pay for a second appraisal with some lenders, this may cause a further delay in the transaction.
2. Properties are being overpriced and appraisals coming in much lower
Properties are going into contract overpriced and over valued and because of this appraisals are coming in under value. Some underwriters are seeing appraisals come in as much as 5-10% or more under contract price. Then because there is such a disparity between the contract price and the appraisal, both the buyer and seller cannot agree on a price or the buyer cannot afford to come in with any more funds and the loan falls apart, as the lender will base their loan to value financing approval for the buyer off the appraised value and not the contract price.
I think this will cease to be a problem soon once the $8k tax credit and low rates go away, as there will be fewer buyers bidding on properties driving values up.
3. Not following recent changes to condominium guidelines
Condo guidelines are changing all the time. For example, is there Litigation in the complex and if so what type of litigation? if it is structural litigation it will probably be turned down immediately.
Are there more than 15% of the tenants delinquent with their HOA dues? If so then Fannie and Freddie for example will not lend in this complex. Is the complex FHA approved? Is the complex Fannie Mae approved? All underwriters recommend contacting the HOA of initially and asking questions to try and dig up as much info as possible on the subject complex.
As condo’s are the type of property that most first time buyers can only afford, it is very important to do some homework upfront, as addressing all of these questions will ensure your loan will get approved.
4. The loan file does not qualify for the loan program
In many circumstances the loan file does not get submitted for the right loan program or to the correct lender. A good example is let’s say a husband previously bought a property in his name only before they were married, but now he has a short sale on his credit. When the wife with the clean credit tries to buy a home in her name only and tries and qualify through FHA financing, they will not qualify because the FHA must take into consideration both of their credit reports.5. No one explained the buyer’s motivation so we turned their loan down
This is a subject that is especially annoying to an underwriter, whereby loan files are being submitted without any explanation. It is important to note that underwriters are not giving the benefit of the doubt so they will turn these files down immediately. For example a buyer lives in a 2800 sq feet home on an acre that is worth $550k, but goes into contract on an 1800 sq feet condo worth $325k. An underwriter will turn this down immediately becuase she assumes that this is probably an investment property purchase, (because this is considered buying down and why would they move out of their nicer bigger home).
The correct thing to do here is to provide a letter of explanation written by the buyers advising that they are near retirement age and the upkeep of this bigger house is too much for them. As homes are much more affordable now and they are are preparing for retirement age in 3 years, they want to buy a smaller house that will not have any stairs or a large yard to maintain. This now makes sense to an underwriter and will get approved in most cases.
Do your homework before you buy a property
I hope these 5 reasons provide an insight into what the underwriters are looking for on transactions. Remember sometimes it is taking almost two weeks for an underwriter to decision a loan, so if the loan is not worked up correctly at the beginning you can find yourself in the middle of escrow with a loan application that just got denied. This is why it is so important that you work with a mortgage professional that understands the market and will take the time to answer all these difficult questions that will arise.
If you are looking to get pre approved for a home loan or are running into difficulties with your current loan application because of one of the aforementioned reasons above, please feel free to contact me and I would be hapy to help out. I look forward to chatting soon.
