It was the perfect house for a young couple just starting out: a split-level in Woodridge with four bedrooms and 1 1/2 baths. Newlyweds Jeff and Barbara Annunziata applied for their mortgage loan and sat back to nervously await the outcome.
At first they were confident. ”Everything looks good,” the mortgage company assured them. But then the questions started-the endless requests for bank statements, employment verification, check stubs, income tax returns, Social Security cards.
”It got to the point where I was scared to open my mailbox,” says Jeff Annunziata, a 26-year-old sheetmetal worker. ”They wanted to know everything but my personal whereabouts all the time. I was at the point where I wanted to tell them to forget the loan and the house.”
The Annunziatas eventually were approved for the loan, but the six weeks between the time they signed the initial contract and closed on the property were some of the longest and most frustrating in their young lives. And the couple isn`t alone. As guidelines tighten and lending practices become more conservative, first-time home buyers are finding that qualifying for a mortgage loan requires the fortitude of Rambo and the patience of Mother Teresa.
”Nobody told me it was like this,” Annunziata says. ”I thought buying a house was like buying a car, only on a larger scale. Buying a car is a breeze compared to this. It`s a scary thought, but if you want a house, this is what you`ve got to do to get one.”
Planning ahead
What you have to do is begin to prepare for the loan approval process well before you actually venture into the real estate market. Too many first- time buyers concentrate on amassing a down payment to the exclusion of meeting the other guidelines required for a loan. But a year of low credit-card balances, timely payments and healthy bank statements can be as important to their success as having 10 percent to put down.
”When people buy homes for the first time, they`re worried. They want to know: Are we going to get the loan?” says Alexandra Schroeder, a loan consultant in the Wheaton office of Universal Mortgage Corp. ”I hand-hold first-time buyers through the process. Have patience-I say that a lot. Please endure.”
The three basic areas all lenders will examine in minute detail are the applicant`s job history, credit history and financial means. Lenders want to see two years of job stability with the same employer or in the same field, Schroeder says. ”Lapses in a person`s job history indicate instability, although the reasons behind it are important.” Lenders realize that responsible workers may lose their jobs in a takeover, for example, so explanations for any gaps in employment history must be provided.
Credit history is, of course, a key indicator of an applicant`s ability to faithfully meet 30 long years of mortgage payments. When lenders express an interest in seeing a record of timely and regular payments, they mean every bill, every month. Any deviation from a spotless credit record must be explained. ”People think: So what? I had one lousy late payment,” Schroeder says. ”But lenders want a written explanation of why that payment was late.” Patricia and her husband (who asked that their last name not be used)
were astonished by the exhaustive analysis given their loan application when they decided to sell their Chicago home and buy a new one in Bloomingdale earlier this summer. ”I had no idea they`d go back as far as they did-five years,” Patricia says. ”And the minutest problem came up.” A department store had canceled the couple`s credit card after they disputed a $12 balance several years ago. The mortgage company required a detailed explanation for the cancellation, she says.
2 strikes and you`re out
Probably the worst transgression a potential buyer can commit is not paying a past or current mortgage on time. Most lenders will have a difficult time accepting more than one or, at the most, two slips. ”One late payment can be explained, but being late consistently is bad news,” Schroeder says.
”Sometimes an explanation from your lender can clarify that.”
People with bankruptcies or foreclosures also will find the going tough, though not impossible. Many lenders will listen to explanations that involve divorce or illness or, in some cases, the loss of a job. In any case, people often can put a bankruptcy behind them in as little as two years if they re-establish good credit. Schroeder suggests getting a credit card, keeping the balance low and paying it in full each month.
A large down payment-say, 25 or 30 percent-can also make up for a multitude of credit-related sins, says Gary Richardson, a real estate agent in the Lincoln Park office of Coldwell Banker. ”With a 25 percent down payment, some institutions don`t even need income verification,” he says. ”They figure that once you`ve got 25 percent of your own money in a property, you`ll do anything you can to make the payments. Or you`ll sell the property to get your money out and pay off the mortgage.”
Another aspect of their credit profile that many buyers don`t consider is the extent to which credit cards or car loans can limit their borrowing power, Schroeder says. ”They`re letting things that are costing them money hurt their buying power on a home,” she says. ”If you really want this home, why let cars and furniture that will decrease in value keep you from getting a home that will increase in value?”
Lenders use ratios to determine how much a buyer can afford in monthly mortgage payments. The standard ratios for conventional loans-28 percent and 36 percent-mean that the buyer can`t spend more than 28 percent of his or her gross monthly income on the mortgage, interest, taxes and assessments. Those housing expenses plus fixed expenses such as car loans and credit card payments can`t equal more than 36 percent of the buyer`s gross monthly income. ”To lenders, it`s not whether you pay off your credit cards every month, but how much you charge each month,” Schroeder says. Lenders count those revolving charges as long-term debt and ”for every $10 of long-term debt you`ve got, you lose $1,000 in borrowing power on your mortgage.”
Clean up your act
Schroeder recommends that potential homeowners do some credit housecleaning before they`re ready to buy. Since installment loans with less than 10 months of payments left on them aren`t considered long-term debt by conventional lenders, it makes sense to get your payments down to that level before applying for a loan, she says.
Credit cards, too, won`t be long-term debt if you pay off the balances and then don`t use them for a few months. When Jeff Annunziata was told by his mortgage company that he could improve his ratios by canceling one of his credit cards, he dutifully cashed in some savings bonds to pay off the card`s $3,000 balance.
Schroeder tells of another hopeful buyer, a young physician, who thought he could afford a house in the $160,000 range until Schroeder started tallying up his long-term debt for medical school loans, credit cards and the Cadillac he drove. ”It reduced his borrowing power to a $90,000 mortgage,” she says. The doctor wasn`t pleased.
”What you think you can afford isn`t necessarily what a bank will lend you,” Richardson says. ”A problem we find is that people don`t qualify at the level they wish, so they rent for another year rather than settle for buying a place that`s not up to their standards.”
However, the ratios used by lenders aren`t carved in stone; buyers with few or no fixed expenses are often allowed to go beyond the 28 percent figure for housing. And coming up with a down payment of 20 percent or more can convince lenders to tolerate more in fixed expenses. Some lenders are just more liberal, using ratios of 30 percent and 40 percent to qualify buyers, Richardson says.
Cash upfront
The third guideline used by lenders is perhaps the most obvious: Do you have enough cash to cover not only your down payment but also the closing costs and the first two months` mortgage payments? Lenders will require bank statements that prove you have the money in hand at the time you apply for the loan. Then they`ll check again and again before closing.
Many first-time buyers are surprised to find that they need substantially more money than just their down payment, says Maria Bono, a loan officer at CenTrust Mortgage Corp. in Skokie, who gives frequent classes through the Northwest Real Estate Board on how real estate agents can prepare their buyers for the loan application process.
On a $100,000 house, for example, buyers applying for a conventional mortgage will be expected to have a $10,000 (10 percent) down payment, $3,000 to $4,000 for closing costs and another $2,000 to cover the first two mortgage payments. Buyers who can qualify for an FHA-insured loan will be able to get by with less.
The costs pile up
Closing costs include such things as private mortgage insurance premiums for buyers who are putting up down payments of less than 20 percent, loan settlement charges, points charged by the lender (each equal to 1 percent of the loan amount), document preparation fees and legal fees. Then there are the escrow payments for hazard insurance and real estate taxes. You get the picture. It all adds up-fast.
But even first-time buyers who are well aware of lenders` guidelines may be in for a shock once the loan application process begins. ”It was kind of amazing,” says Jeff Annunziata. ”I never thought they could come up with that many questions.”
When the mortgage underwriter asked for the couple`s Social Security cards, Barbara Annunziata had to get a duplicate card; she`d lost the original several years earlier and had never bothered to replace it. When his paycheck stubs didn`t include year-to-date income figures, Annunziata was told to have his boss provide the information in writing.
”My boss has been the best through all of this,” he says. ”One day at work he told me, `Gee, you get more phone calls than I do.` ”
Be prepared
To make the grueling process as painless as possible, Bono suggests that potential buyers begin keeping good records a year before they start looking. Getting all the necessary items together before sitting down to make the application eliminates some of the hassle.
Once the application is completed, it`s turned over to a loan processor, who builds a file of all the necessary documentation. Bono recommends that buyers get to know this person and to check with him or her every seven to 10 days to make sure the necessary information is coming in from employers, banks and others. ”Always be nice to the processors,” she says. ”It`s a very stressful job and they work a lot better with you if they like you over the phone.”
Even as the days to closing dwindle down to a final few, Schroeder cautions buyers not to take anything for granted. Lenders will continue to check that they aren`t borrowing money to make bill payments or that they didn`t spend carelessly after making the loan application. ”Now they want bank statements up to the day before closing,” she says.
The fear of getting to the end of the approval process only to be turned down for the loan is a common one, especially among first-time buyers or buyers, like Patricia, who haven`t been in the market for some time.
”I`ll never do it again, ever,” she says. ”It`s like your life is laying on the table before you. I had to go before a committee and they had to approve or disapprove of all of my life.”
Annunziata recalls being so shaken by the approval process that he began to wonder whether he really could afford a home after all. ”They asked me so many questions that I started worrying about whether my projections were right.
”You give them everything they ask for, then you sit back knowing it could all be for nothing. Now I know why people hang on to their homes. I know I won`t go through this again, ever. Not unless someone offers me double what I paid for it.”
