Mortgage Approval and the One Rule You Need
NEW YORK ( MainStreet) Consumers seeking mortgage approval may not be aware that each lender has its own set of rules.
Getting your mortgage approved depends greatly on where you submitted your application since all lenders have different requirements, some seeking more stringent standards than others.
The rejection rates ranged from 11% to 34% in 2012 from the ten largest mortgage lenders, according to date from the Federal Financial Institutions Examination Council. Some mortgage lenders turned down more potential home buyers than others Chase rejected the most consumers with 26,894 out of 80,036 or over 33% being rejected while SunTrust only denied 3,831 out of 34,749 applications or slightly over 11%.
The discrepancy over why some mortgage applications are approved from one lender while another one gets denied at a competing company depends on several factors. Consumers should definitely shop around or wait until their financial situation improves such as having a large down payment, experts said.
While this does not occur often, some lenders do have stricter requirements, said Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania.
Since some of the loans are sold to Fannie Mae or Freddie Mac, lenders may seek to use stricter rules, referred to as "overlays," he said. Lenders do this for one of two reasons. One reason is that the agencies keep records on the performance of loans they purchase from each loan originator. That performance record affects the price they pay the originator, Guttentag said.
The second reason is that loans that are sold to one of the agencies that on subsequent examination are viewed as not fully meeting the requirements will have to be repurchased by the originator, he said. The lender will then have to take a loss in selling it elsewhere.
If you get turned down by a mortgage lender, it may mean your credit score is too low or the lender sees you a risk, said Guttentag. Searching for another lender may not be in your best interest because you are likely to pay a much higher interest rate.
"If you get turned down, you are at best a marginal case and you will pay a steep penalty to any firm that accepts you," he said. "Hence, you might want to reconsider whether or not it wouldn't be better to wait until such time as you can improve your credentials."
If you know a specific aspect of your application may raise a red flag, asking a loan officer before you turn in your application might be a good bet, said Tim Lucas, editor of MyMortgageInsider.com, a website that helps consumers understand mortgage and real estate.
"Borrowers who are worried about a specific aspect of their loan should ask the loan officer upfront what their bank's rules are about it," he said. "If that lender won't accept their loan, they should keep calling around until they find a lender who has more lenient guidelines."