Interest rates fell to new lows in September. Low interest rates increase affordability and should make it easier for buyers to qualify. Yet stories of buyers waiting months to gain loan approval and home purchase transactions not closing on time due to lender’s strict underwriting are all too common.
Some buyers are turned down for illogical reasons. For instance, if you have investments — even if they’re performing well — an underwriter might deny the mortgage because your portfolio doesn’t fall into the underwriter’s risk assessment model.
One couple was turned down because the husband had worked at his current job for less than a year — even though he was making more money at the new job than he was before.
These buyers were well-qualified. The wife had worked several years for one employer and was able to qualify for the loan on her own. So, the transaction closed, although two months late.
Generally, it’s more difficult to qualify now than it was a year ago. Most conventional lenders require a 20-25 percent down payment. For the lowest interest rates, your credit scores need to be in the 700 range. You need to have verifiable income and cash reserves in addition to your down payment and closing costs.
You could run into underwriting problems if you’re self-employed, as W-2 income is much easier to verify. Other hurdles are lapses in employment and owning a lot of property. Some lenders won’t lend to buyers who have more than three or four residential properties.
If you’re buying a new home before selling your current home, you’ll need to have 30 percent equity in your current home. This needs to be verified by the lender’s appraiser. Also, the lender will want to see a copy of the cashed check from the tenant for the first month’s rent to verify rental income if needed to qualify.
HOUSE HUNTING TIP: As soon as you’re serious about buying a home, find the best mortgage broker or loan agent you can to assist you. Don’t make your selection based on interest rates alone. A good track record counts for a lot.
Closing the deal should be your primary goal. If you have to pay 0.25 percent more to assure your transaction closes on time and that you’re not turned down at the last minute, it’s worth it.
Be candid with your loan professional about anything in your financial picture that might impact loan qualification. A good loan agent or broker will be able to assess your financial situation and anticipate what you’ll need to do to satisfy the underwriter.
Be aware that appraisal issues can impact your loan approval. For example, if a previous owner added square footage without a building permit, the additional square footage probably won’t be included as livable square feet.
If the appraisal comes in for less than the purchase price, the lender might not lend you enough to close the deal. Include an appraisal contingency in your contract.
As of Oct. 1, the conforming jumbo mortgage limit for expensive housing markets like New York City and San Francisco dropped from $729,750 to $625,500. In some cases, conforming jumbo lenders have moved into the market to pick up some slack. You can expect to pay about 0.25 percent more for a 30-year fixed-rate conventional jumbo loan, in some cases. However, today’s lower interest rates will help boost affordability.
There are more jumbo financing options available now. Adjustable-rate mortgages that are fixed for 10 years and then revert to an adjustable have a starting rate about 0.25 percent less than a 30-year fixed jumbo. A five-year fixed starts about 0.5 percent to 0.75 percent lower, but is riskier.
THE CLOSING: Because of the risk factor, the lender may want you to have a large cash reserve. Your retirement account counts toward this.
Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide."
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