As the jumbo loan and refinance market begins to pick up, it’s important to remind consumers of important tips to ensure their credit is and remains in good standing before applying for a mortgage – and what to do if they are turned down for a mortgage.
In general, lenders have more flexibility when qualifying borrowers for a jumbo loan ($417,000 in most areas and $625,000 in some high-priced areas) since mortgages below that threshold must meet stricter standards for conventional loans. Borrowers who are denied a mortgage because they do not meet qualifications must be sent an “adverse action notice” or a statement of credit denial providing the denial reason, which is typically sent within 48 hours after verbal notification.
In 2013, jumbo and conforming loans had 14.5% of all home-purchase loan applications and 22.7% of refinance applications denied compared to 18.7% of home-purchase loans and 39.6% of refinances denied in 2007. The main reasons for a mortgage denial include credit history, high debt-to-income ratio, a reflection of the borrower’s income relative to monthly payment amounts, and insufficient reserves. During the home buying process, borrowers should be made aware that a mortgage denial does not turn up on their credit report, only a credit inquiry, which accounts for 10% of their score.
Another important tip for the consumer is to avoid opening any new credit cards or a car loan as this can raise their debt-to-income ratio for 90 days before applying for a mortgage. Limiting deductions can also help maintain a lower debt to income ratio, as self-employed borrowers may want to limit deductions on the past two years of tax returns to indicate higher annual income. Jumbo borrowers with either a bankruptcy or foreclosure will also need to wait to apply for a mortgage for 4 to 10 years depending on the lender, even if their financial situation has improved.
As always, communication is critical – borrowers need to spend time with a trained loan officer finding out the process and answering the “what if’s”!
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