Perhaps the most common issue in today’s mortgage industry is a low loan-to-value ratio. This is the percentage of the loan amount compared to the overall value of the property. For example, if you currently have a balance on your first mortgage of $200,000 and the appraisal comes back with a value of $250,000 then your loan-to-value ratio (LTV) is 80 percent. For a conventional loan, lenders require a minimum of 5 percent equity or a maximum LTV of 95 percent. Of course, the problem is that over the past 2 years many areas of the country have seen properties decline in value by 10 to 20 percent or more causing many homeowners to have a high LTV ratio. Even if they are under 95 percent, plenty of homeowners still find themselves having to settle for higher interest rates, PMI payments, or both.
Another common reason why mortgage applications get denied is an issue with the borrower’s credit report. A lot of attention is paid to the FICO score, which will have to be at least 620 with most lenders and over 720 to get the best interest rates. Very often medical collections show up on credit reports without the applicant having ever been notified by the medical company or their insurance company. The balance of a medical bill will simply be sold to a collector who will immediately contact all 3 credit bureaus.
Lenders will require that all collection accounts be satisfied prior to closing and many times it could take months before an applicant is able to pay it off and get it removed from the credit bureaus. Also, if there are any other issues such as late payments, liens, and high balances, it is best to take care of it ahead of time because lenders will not accept updated credit reports once they are pulled for an application.
Also, a reason to get denied is if the applicant’s debt to income ratio (DTI) is too high. The DTI is a simple calculation which starts by first taking the total of all applicants’ gross monthly income before taxes. For example, if a married couple makes $40,000 and $50,000, respectively, then their gross monthly income would be $7,500 ($90k/12). Often overlooked, insufficient reserves can prove to be the difference between a closed loan and a denial. What most people do not know is that most lenders will require at 2 months of reserves for loans with loan-to-value ratios over 80 percent. This can be a great deal of money. For example, if the loan amount is $300,000 the principal and interest portion of this, depending upon the interest rate, can be as much as $1,600.
Perhaps the most infuriated mortgage applicants are those that receive a “subject to” appraisal. This means that the appraisal report and the value for the property is subject to certain conditions being completed, typically repairs to the property. These days, every detail of a property’s appraisal is scrutinized and the repairs needed might seem trivial to a potential borrower, but many lenders will refuse to close on a loan until appraiser’s conditions are met.
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