What You Really Need to Know About Today’s Mortgage Lending World

You're not going to be able to skip steps in the mortgage lending process. Here's the reality of what it takes to get a mortgage.

Are you trying to qualify for mortgage financing? Telling your story to a lender without providing thorough financials and pulling credit is a recipe for disappointment.

The mortgage industry is a bureaucratic environment. Consumer protection and compliance remain supreme with mortgage lenders and banks. Financial institutions are under tight scrutiny from the Consumer Financial Protection Bureau and as a result, must be specific about what they can and cannot do in regard to credit decisions. Loose underwriting in the mortgage industry was blamed for helping cause the financial crisis in 2008. The pendulum has swung 180 degrees and, as a result, getting a mortgage these days requires playing by the rules.

Consumers, on the other hand, want information quickly so they can make a decision. Unfortunately, mortgages do not work like that for the lion’s share of mortgage loan applicants. If you’ve had financial difficulties, and you think you may not qualify for financing, you might go to a lender thinking, “I don’t want to waste your time so, I am only going to provide the bare-bones information and then you tell me if you can do the loan.” Any lender who says they can make a loan based on bare-bones information is doing you a disservice (here’s a quick guide for understand mortgage lingo).

No moral lender has the ability to give you a “what if” scenario without seeing your entire financial picture. This includes your financial documents and credit report. Based on this information the lender can tell you the exact loan amount you qualify for, the purchase price you qualify for, what is hurting or helping your file, how your cash-to-close comes into play and how your file can be put into a workable loan with a chance of closing.

But I Don’t Want to Pull My Credit

If you don’t want to pull your credit because you don’t want the inquiry, you’re out of luck. The lender is required to pull your credit to decide whether they can put together your loan. Keep in mind: Credit reports are not transferable between financial institutions, so you can’t use one lender’s reports to take to another.

A credit pull will show up as an inquiry on your credit reports and could have a temporary impact on your credit scores. In most cases, though, as long as you’re not shopping for other forms of credit, applying for a mortgage does not adversely affect your credit score (if you don’t know where your credit stands, you can check your absolutely free credit scores right here on Credit.com).

Why Can’t I Just Find Out the Terms Up Front?

You may not want to provide your full financial documentation until you know what a lender can offer. It doesn’t work that way. Rates, fees, the loan amount, the loan program and the entire basis for the loan can change based on your financial supporting documentation. A lender requires these documents and a credit report to give you numbers they can actually deliver on.

But I Just Want to Know About Loan Programs & Rates

The lender needs to evaluate your income, credit score, liabilities on your credit history and financial profile to tell you what you qualify for now, and what you could qualify for in the future. Again, the lender needs a full financial picture to tell you what you can borrow.

But I Was Already Denied Once Before

Not all lenders have the same appetite for risk. One might make your loan while another could refuse. Some banks have more aggressive underwriting. As a result, you have to provide financials to get different scenarios run for your financial profile.

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This Simple Trick Can Keep Mortgage Paperwork From Becoming a Huge Hassle

Securing a mortgage requires a laundry list of paperwork. But there’s a way to simplify it.

Every year for your tax returns, you gather together paperwork such as receipts, explanations, paystubs and W-2s. Seventy percent of this information contains the same things you’ll need for getting a mortgage loan. If you do your taxes on time in April and save your documents in a secure, easily accessible location, you can use it to to support your application for a home loan later in the year.

In an encrypted thumb drive, round up all your “mortgage documentation.” (Just remember the password for the thumb drive and, of course, where you ultimately choose to store it.) Within the drive, make subfolders that have the following titles:

  • Tax returns: You can include all pages and schedules of personal returns and corporate returns. Mortgage tip: Make a PDF of this information for future use and store safely.
  • W-2s: same concept, but you’ll need the most recent two years.
  • Pay stubs: every time you get paid, download the pay-stub in PDF format onto the thumb drive and drag and drop it into the folder. It shouldn’t take too long and can save you a ton of time in the future.
  • Bank statements: every month when you pay bills simply download your bank statements in PDF format and similarly add them into the appropriately titled folder.

Be sure to delete any sensitive information that is not properly protected on your computer to minimize your risk should you accidentally download malware onto your computer or otherwise get hacked.

Doing the above things does create a bit more work on an ongoing basis, but it insures you are prepared. These documents can also help your applications for other types of credit in the future, including:

  • car loans
  • student loans
  • personal loans
  • home equity lines of credit
  • credit cards
  • any credit offers

Documentation planning will make the process of obtaining credit less of a scramble, keeping supporting documentation literally at your thumb tips. Save yourself from the need to go “digging.” If applicable, also have this information handy:

  • Your divorce decree: have the divorce decree including all pages, all schedules and the schedule of creditors in a saved folder.
  • Prior foreclosure documents: have the trustee’s sale date deed.
  • Short sale documents: have the final settlement statement from that transaction.
  • Alimony or child support paperwork: have the agreement paperwork.
  • Information on tax debt: have state and/or federal payment plan on file.

Requests for the documentation referenced in this article are consistent with today’s mortgage lending world. Be smart, be prepared and make sure you have the documentation ready before the lender asks for it to minimize hitting any snags.

Remember, too, your credit score will also play into your ability to qualify for an affordable mortgage. You can keep track of how your credit by viewing your free credit report summary, along with two free credit scores, updated every 14 days, on Credit.com.

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Is There Really Any Difference Between Mortgage Lenders?

difference between mortgage lenders

The Consumer Financial Protection Bureau has safeguards in place to make sure mortgage companies operate on a level playing field with consumers. The level playing field specifically has to do with rates, pricing and whether borrowers are getting a fair and reasonable offer from one lender to another. But how banks look at your financial picture is something else entirely.

Here are some factors that impact how your mortgage company works and the deal you get on your mortgage.

What’s Their Relationship With Fannie Mae & Freddie Mac?

The relationship your mortgage company has with Fannie Mae and Freddie Mac carries significance in whether or not they can fund your loan even if it is slightly outside of the box. For example, if you’re dealing with a company who originates the loan through another source, and then ultimately that loan is sold on the secondary market, the mortgage originator may be more conservative in their product offering and underwriting. Simply put, the more hands touching the file, the more scrutiny that file is going to have when the loan ultimately is delivered to the end investor.

Are There Investor Overlays?

Some mortgage companies still have what are called investor overlays, which are additional constraints an individual mortgage company may have beyond what Fannie Mae and Freddie Mac deem as acceptable as traditional underwriting standards. For example, some mortgage companies will not let you pay off debt to qualify while others do.

What Products Do They Offer?

Not all lenders carry the same types of loans and some have differing restrictions for some loan types. For example, the debt-to-income ratio (DTI) can differ between lenders. If you have a DTI on a jumbo mortgage (a special kind of mortgage based on the amount of the loan) beyond 43% some companies won’t work with you, while others will go as high as 49%. Another example could be an FHA loan with a credit score say at 600 versus one at 640. Some work with a 600 score, some do not. (You can check your credit scores for free on Credit.com to see where you stand.)

Where you get your mortgage is entirely up to you as a smart, well-informed consumer. Do not be fooled by a lender or mortgage company promising you the world just to get your business only to find later on your loan has too many roadblocks or your financial picture does not meet the guidelines set forth by that company. Integrity in lending and helping consumers is quality you should look for when picking a reputable mortgage source.

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How to Get a Mortgage After a Loan Modification

get a mortgage after a loan modification

One of the challenges many homeowners faced in the recession was financial hardships. Loan modifications were often a short-term solution banks offered for homeowners facing delinquency, income changes or loss of home equity. If you have a loan modification but want to move and buy a new home, here’s what you need to know about getting a new mortgage.

What Is a Loan Modification?

A loan modification is any change to the original terms of a mortgage that resulted in the restructuring of any of the following: principal curtailment, forgiveness, forbearance, payment reduction or any change of terms from the original loan note. (Check out this mortgage glossary to get a better understanding of some of these terms.) Each loan modification is different, but the most common form involved simply a reduction in the mortgage payment.

Important Timeline Details

Generally, conventional mortgage loan guidelines require you have 24 months of payment history on the subject property (the property you want to get a new mortgage on) since the date of the modification, or 12 months of payment history if you trying to finance the non-subject property. Put another way, if you had a loan modification on a house 12 months ago, but are looking to finance another property, you should be in the clear. If you had a principal balance forgiveness, also called a write-down on your mortgage, you’ll most likely be ineligible for most conventional mortgage loans. If your loan payment was reduced only, and you have the 12 months or 24 months rating, depending on your financial situation, you’re more than likely eligible for financing again. (You can read about mortgage refinancing guidelines here.)

Was Your Loan Modification Reported?

The mortgage holder that did the modification will typically report ‘restructured or modified mortgage on your credit report. In the event you have a modified mortgage, but the credit report does not indicate so, this could be beneficial, as lenders work off the credit report. (To see how the loan modification is affecting your credit score, you can get a free monthly credit report summary on Credit.com.)

You need to provide a copy of the original modification terms specifically detailing the modification if you have a modification in your past to lenders. Some lenders who provided loan modifications to borrowers have different interpretations of what Fannie Mae and Freddie Mac consider to be a modified or restructured mortgage.

This is something that can work in your favor. Most, but not all loan modifications, involved signing new paperwork detailing the specifics of the loan restructuring with a mortgage loan servicer. If your loan was changed, but you did not sign any paperwork, your loan may report normally to the credit bureaus, wherein documenting the loan modification wouldn’t be necessary and you may avoid the waiting time.

Most banks that originate, bundle and sell loans to the secondary market operate off the same guidelines regarding waiting times. In many situations, bigger banks have investor overlays that add another layer of inspection to a loan that may not necessarily need it, but is in place to insure less-risky loans. If you’ve been turned down before, based on the previous loan modification situation, you owe it to yourself to get a second opinion. Mortgage banks that deal directly with Fannie Mae and Freddie Mac may be more viable source for securing a loan.

[Offer: If you’re applying for a new job, worried about errors on your credit reports, and you don’t want to go it alone, you can hire companies – like our partner Lexington Law – to manage the credit repair process for you. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

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