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You Won the Bidding War! Congratulations You Lost!

A Federal Reserve Study that analyzed millions of mortgage applications recently ranked the top three reasons that applications  were rejected.

DTI

Not surprisingly the “numero uno”  reason is inadequate DTI. The Debt to Equity Ration was the primary reason for denying almost 25% of all applications, 23.4% to be exact.

The federal guidelines for DTI is 43% meaning that your auto loans, credit cards, student loans and other monthly credit obligations, the mortgage you’re seeking including principal, interest, taxes PMI, and insurance should make up less than 43% of your monthly revenues.

Fannie Mae and Freddie Mac may allow you to go to 45% DTI and FHA can go a bit beyond that too but the reality is that the lower the DTI the higher are your chances to qualify for the mortgage and probably the happier you will be to boot.

Student Loans play a major role in your DTI especially for first time buyers because they factor in your monthly debt calculations and FHA even factor in loans that are in deferment.

Credit Issues 

If you have serious credit problems and your FICO scores are depressed your mortgage application could be DOA. About 20% of all turn-downs are the result of credit issues and poor FICO scores.

What a lot of people don’t know however is that even paying on time may not be enough. One particular concern for lenders is “High Utilization” of your available credit. Absolutely avoid maxing out!  Lenders prefer to to see that you are using 33% or less of your available credit for all your credit limit accounts. The lower your utilization scores the better.

“During 2015, according to researchers, one of every eight home purchase loan applications (12.1 percent) ended in a rejection. Denials were higher for borrowers seeking government-backed loans (FHA, VA, U.S. Department of Agriculture) at nearly 14 percent, and lower for those applying for conventional mortgages eligible for purchase by investors Fannie Mae and Freddie Mac (10.8 percent).”

What should you do or better yet what can you do to fix your credit issues?  First thing is give yourself time! Contact a loan officer at least four months prior to your purchase and work with them to remedy these issues.

Property Valuation

Property valuations are the third most common reason that loans get turned down accounting for about 14% of all rejections.  This one here is a little more tricky and it goes right to the issue of working with a top notch real estate agent who has your best interest in mind – not their commission!

If you won the bidding war by paying more than the home is worth or than it can appraise then you’ll either have to come up with a bigger down-payment or you will lose the home.

It’s very easy to get carried away in a bidding war for that “ONE” home you searched for seemingly all your life but here is the reality:  most of the time there will be another. Make sure your agent knows how to do a no nonsense rigorous CMA ( comparative market analysis) so that way you’ll know what to expect. It wouldn’t be a bad idea to also see if the owner did an appraisal prior to listing it and maybe even do your own appraisal if the owner agrees.

In cities and other areas with lots of similar properties and high turnover a good CMA can come in pretty close to reality. If you are in a market where there are a lot of unique homes and lower turnover than the CMA needs to be carefully done. Here is how I do the CMA in such cases

The bottom line is that being the winner of a “bidding war” that gets out of proportion with reality and you paying a price that you cannot afford or finance is in fact losing not wining

 

 

Sources 1 2

 

Constantin Hinova | Prominent Properties Sotheby’s International Realty | Mobile: 917-545-3438 |

321, Washington St  Hoboken NJ 07030

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