With a broad smile and the stroke of a pen, President Barack Obama capped a contentious 18-month struggle and signed into law the broadest revamp of financial regulation since the Great Depression.
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.
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.
"That is why we always recommend going with a local lender, whom we have referred many pleased clients to. For a source of good local lenders, feel free to contact us anytime." by Doug Masi and Tom Walsh
