The lending landscape has changed quite drastically over the past several years. Practices, approvals and standards that were once widely accepted have either vanished or transformed beyond the point of recognition. Many banks, which were once extremely careless with their loan underwriting techniques and approvals, have dug themselves into a significant hole that will take many years to climb out of. Promotions such as "100% Financing" and "No Doc Loans" were both major contributors to the financial crisis banks and consumers are facing today.
Today, banks are making sure they don't make the same mistakes again, so loan underwriting standards have become more stringent than ever before.
According to a recent Federal Reserve survey, it was found that about 75% of the banks surveyed indicated they had tightened their lending standards for prime, subprime and commercial mortgages. That was up from about 60% in the previous survey. With this sharp increase in lending standards, borrowers are being turned down for real estate loans at an alarming rate.
Here are the top seven reasons banks are denying home loan requests:
1. Poor credit: The borrower may have a heavy down payment or excellent equity built-up in their house, but if their credit score is under a certain threshold, obtaining a new loan or refinance from a traditional bank is challenging. Even FHA (Federal Housing Administration) loans, which have traditionally catered to borrowers with lower FICO scores, have an average borrower credit score of 693, according to CNN Money, which is above the national average.
Here are the top seven reasons banks are denying home loan requests:
1. Poor credit: The borrower may have a heavy down payment or excellent equity built-up in their house, but if their credit score is under a certain threshold, obtaining a new loan or refinance from a traditional bank is challenging. Even FHA (Federal Housing Administration) loans, which have traditionally catered to borrowers with lower FICO scores, have an average borrower credit score of 693, according to CNN Money, which is above the national average.
2. Insufficient liquidity: If the borrower doesn't have a heavy down payment (20%-30% for most banks) and strong excess liquidity, banks don't want to take the risk on funding their loan.
3. Lack of income: The borrower doesn't have consistent proof of income for the last two to five years. Regardless of how good their credit score is or how much equity they have in their home, if they can't show the bank proof of income, loan approval will be tough. This can be a big hurdle in the loan process, particularly for retired borrowers.
4. Lying on the application: Banks have learned their lesson and are no longer putting up with borrowers stretching the truth on their applications.
5. Debt: Borrower has excessive debt and their debt-to-income ratio exceeds the bank's guidelines.
6. Unemployment: Most lenders will like to see at least two years of stable work to issue loan approval.
7. Self employment: Lenders are looking at self-employed applicants with a lot more scrutiny these days, making it very tough for these borrowers to get approved.
Obviously some of these newly structured standards are for the betterment of the industry,and our overall economy, but at the same time, home buyers across the country are realizing quickly that reputable credit and stable income aren't always enough in qualifying for a loan through a traditional bank.
This predicament is not only affecting potential home buyers, but also the real estate professionals who represent them. Real estate professionals nationwide have expressed that this has become a challenging part of the transaction.
According to Monique Bryher (http://www.californiarealestatefraudreport.com/), a broker associate at Keller Williams Realty, "Home buyers are definitely having a harder time in being qualified. Several of the loan officers with whom I work have complained that loans that would have been approved 6 months ago are being denied now. What's interesting is that loan applications in terms of volume are up, lenders are busy processing them, but it's harder to get them approved and it's taking longer to close even simple, straight-forward transactions."
Once the traditional lending route has been exhausted, both Realtors and potential buyers are often times at a loss of what to do as a backup plan. Private lending has been around for many years, but most borrowers and brokers have no idea that it's even an option.
"With the strict underwriting guidelines banks are governed by these days, private lending is the wave of the future for getting real estate loans funded," explains Eric Wohl, president of NoteFlo, an online private lending marketplace launching today. NoteFlo's unique service allows borrowers to post loan funding requests for free, which will be broadcast out to thousands of private lenders that will bid for the opportunity to fund their loan. "Our goal is to make sure borrowers know that they have plenty of other options if their loan application is denied by a traditional bank," says Wohl.
Jim Soda, Fine Homes Specialist, Realtor® ABR GRI