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, investor guidelines 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. But, as there is not much any of us can do about the current lay of the lending land, the best advice is to master the current property and lending rules that we have to deal with. Here are the top 5 reasons why loans are getting turned down, they are in no particular order.
1. The property does not meet our ‘flipped rules"
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 and a lot of them do not accept these properties period. 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 your 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 condo guidelines
Condo guidelines are changing all the time. All underwriters recommend contacting the HOA initially and asking questions to try and dig up as much info as possible on the subject complex. 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. (Please note I have a way around this by using a “limited review” which does not require the lender to ask about HOA delinquencies). Is the complex FHA approved? Is the complex Fannie Mae approved?
As condo’s are the type of property that most of our 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 through FHA financing, they will not qualify because FHA must take into consideration both of their credit reports, so the loan gets turned down.
Another good example is where income is not getting calculated properly on a loan file, the underwriters admitted this happens on over 1/3 of all loans. This is especially important these days as Fannie Mae has capped their debt to income ratios at 45%.
Let’s say we have a loan file where the debt to income is at 48% but was submitted to a Fannie Mae lender. Well this loan will probably be turned down. If the income was calculated correctly upfront, a loan that has debt to income ratios over 45% would have been correctly submitted to a Freddie Mac lender that allows debt to income ratios between 45-55% or a FHA lender which also allows some debt ratios between 45-55%.
5. You did not explain your 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.
Stay current and do the research on all loan files
I hope these 5 reasons are helpful to you and your business and provide an insight into what the underwriters are looking for on transactions. Remember sometimes it is taking over a week or two for an underwriter to decision a loan and sometimes there will be appraisals already done before the underwriter gets to decision the loan ile also. So this can really create a serious delay on a transaction if the loan gets turned down and you have to submit it elsewhere and the appraisal that was done is not transferable between lenders either. This is why it is so important to do a lot of homework upfront on a buyers file so it is submitted correctly and to the right lender.
I believe the secret to this market is to stay on top of all the guidelines and rule changes that are occurring. Put aside a little time everyday to read these changes so you are always current. If you ever have any questions on a loan that got stuck recently or you need any help with any buyers, please feel free to contact me, myself and my team will be happy to help out you and your clients so you can get your loans funded. I look forward to chatting soon.
