Understanding and Succeeding with Today’s Home Loan Application Process

Too Many Applications

You might expect the declining interest rate to have immediate positive impact on the home-buying market. However, because the low rate entices those who are already homeowners to refinance into loans with cheaper long term interest rates, the overall effect on banks is overload. Even with financial institutions prioritizing purchase files for closing, the unforeseen increase in volume invariably causes delays in file reviews. In fact, ZipRealty Realtors report delays in closing of their transactions due to such heightened residential mortgage activity, with closings scheduled for September pushed into October.

Appraisal Issues

Loans today are often obstructed by low appraisals on property that loan applicants seek to buy. In response to the market’s decline, the Home Valuation Code of Conduct (HVCC) was adopted to ostensibly establish an industry standard for home appraisal. Unfortunately, the appraisals are regularly contracted out Appraisal Management Companies (AMC), which may happen at the expense of local knowledge of a property’s value. In other words, when Realtor, consumer, or local appraiser knowledge is supplanted by that of a centralized (but not local) AMC, property valuations diverge—in a manner unfavorable for the loan applicant.

Adding to this divergence the banks’ increasing conservatism, the industry is arguably producing inaccurate and undervalued appraisals.  As a result, transactions are delayed while homebuyers and sellers scramble to renegotiate pricing terms, seek an additional appraisal, or pull together funds to make up for the difference in the originally stated loan to the value in a revised loan.

Impossible Standards

ZipRealty agents confirm banks are becoming borderline unreasonable in seeking to “make loans safe.” Many real estate professionals have experienced last minute conditions or de novo file reviews on the part of underwriters while operating under the belief transactions were clear to close.  These have occurred with all major national lenders, including Bank of America.  These unforeseen issues frustrate home buyers and home sellers. Now they must deal with a delay in closing while jumping through the many “hoops” banks put in the way.  ZipRealty clients report exasperating experiences of digging through attics to find old documents to prove, for example, that prior liens have been cleared or other properties are owned free and clear.

Strength in Numbers= Hope

As sellers, buyers and real estate professionals across the nation try to negotiate the new lending climate, they create strength in numbers, the kind that brings change. Currently, major lenders are taking definitive steps to improve their underwriting and fulfillment processes and set hard standards for on-time closings, with built in guarantees to consumers. Implementation of the Uniform Appraisal Dataset in January 2012 should also assist in improving the quality and consistency of appraisals.

With this in mind, we can all look ahead with real optimism to balance our current sense of frustration.

What to Do if You Are Turned Down For a Mortgage Loan

In the meantime, if you are rejected for a home loan, these tips may help you.

1.     You Have a Right to Know Why

If you’ve submitted a formal application, federal law dictates that you’re entitled to a formal rejection.  Make sure you get your “adverse action” notice, spelling out the reasons for turning you down. The issue may be the home’s value, your credit, income history, debt load, or something else. Whatever the reason, once you know it, you can set about trying to fix it.

2.     Fixing Problems in Your Application

  • If your credit is the problem, make sure your credit report truly reflects your actual credit history. Your adverse-action notice will name the credit reporting agency that provided the negative data. You’re also entitled a free credit report once per year. See the Federal Trade Commission Web site for more information.
  • If your issue is a high credit card balance but your credit is otherwise good (740 or better), you may also be able to reapply for a loan after you pay down the debt.
  • If you don’t qualify for your loan at today’s  low interest rates, you may be able to get a loan at a higher rate. Caution here: Make sure this higher interest will work for you, both in the monthly payments and over the course of the loan’s term.
  • Get a 2nd opinion. One lender may turn you down when another will approve you. Try credit unions or “community banks” as well as big banks.


3.     Does Reapplying Affect Your Credit?

In a word, yes. But in a few more words, all of them encouraging, it doesn’t affect it very much. According to BankRate.com:

“Making a formal application and then reapplying more than a monthly later could lower your score, but only by about five points. Most scoring systems allow consumers to make multiple mortgage applications within a 30-day period without any negative impact on their credit score.”

Sources: BankRate, Federal Trade Commission, FannieMae and Abbie Higashi, Broker, ZipRealty, Inc.