As most prospective borrowers in search of mortgage financing quickly discover, a standard set of loan requirements dictates the items you’ll be expected to provide. These include tax returns for the two most recent years as well as verification of employment and assets to meet with the “investor’s guidelines.” For most loans, the “investor” is either Fannie Mae or Freddie Mac and even loans channeled through other investor conduits tend to conform to the guidelines or rules these two giants of the mortgage world lay out.
Although Fannie Mae and Freddie Mac’s guideline requirements are similar, subtle differences do exist allowing certain borrowers whose application may be blocked by one to win approval through the other. Most lenders sell exclusively to one or the other, though some mortgage banks will channel loans through both. Keep in mind that neither entity’s guidelines are static. Beyond the pool of more standard requirements for items such as loan-to-value or debt-to-income ratios, one must also navigate a long and constantly evolving inventory of investor dictates. Lenders experience difficulty keeping pace with these changing demands and fear having to buy back rejected loans at great loss. For this reason, most lenders tend to observe the strictest interpretation of investor guidelines and impose their own “lender overlays” to insure a degree of protection.
Although this conservative outlook protects lenders from buy backs, it also causes them to decline thousands of otherwise strong applicants. Some lending sources, sensing opportunity, will remove prevailing overlays and work to gain additional investor allowances to certain requirements, thereby establishing lending niches within the mortgage marketplace. The trick lies in finding who can do what and who will offer the best rate and terms. Here are just a few niche solutions to common reasons for loan denial that some lenders are able to circumvent:
High Debt-to-Income Ratio: On high balance conforming loans, most lenders will not allow a borrower’s debt-to-income ratio to exceed 45%. A few lenders can reliably secure ratios as high as 50% for strong files with compensating factors.
Job Gaps OK: Most lenders will shy away from gaps in employment. A few will allow gaps of up to one year. In a tough economy, this is a lifeline for many would be borrowers.
One Year’s Income OK: Generally a two-year income history is required. With DU approval, a one-year history is allowable.
Non-Permitted Additions Accepted: For most lenders, this would be a deal killer. Some lenders will grant approval as long as the illegal addition was done in a workman-like manner and is not used to support appraised value.
No Flips, 90 Days: Most lenders will not underwrite purchases of homes that have sold less than 90 days prior. Now we can get over this hurdle.
Business Funds: Income from sole proprietorships may now be used to qualify for a loan.
Credits for Recurring and Non-Recurring Closing Costs: These are now permitted to help reduce a buyer’s closing costs.
Nicholas Ballard is both a mortgage broker and banker specialized in the residential Marin market. For assistance, please call or e-mail:
Nicholas Ballard: 415-526-1941; firstname.lastname@example.org
Real Estate Financing
CA Dept. of Real Estate #01356374
California Mortgage Advisors, Inc.
CA Dept. of Real Estate #01170868
Redwood Highway, San Rafael 94903