The Home Equity Loan Zone

Often, when your lender scrutinizes your loan application for a new home or piece of property so finely that it is finally turned down, it can be very distressing. If this happens, you should be able to understand just why such a decision was taken and do what you can to remedy the situation. The cause for rejection given below will help you understand just why it happens to some people.

Causes for rejection:

The appraised value is far too low: Your lender perhaps found the ratio of the loan amount to the sale price or the appraised value of the property to be substantially lower than the purchase price or loan-to-value (LTV) ratio. Or perhaps the LTV is higher than your lender is allowed to approve. Then, perhaps you have applied for 90-95% of the purchase price as the loan amount. A low appraisal will then make your loan request far too large.

If the seller”??s price of the property far outstrips the prevailing rates in your locality, you would be best advised to renegotiate the price with him so that it conforms to the prices in the area. It should also be one which your lender would not refuse in order to pass your loan request. If this can”??t be done, it might be a better idea to accept a smaller loan amount, and pay the balance from your personal funds.

Insufficient funds: When your lender goes through your financial information and you”??re verification of deposit, he will find that you do not have enough funds to make the necessary down payment and cover closing costs. Even if these funds do not come from a loan, a gift could go a long way. Alternatively, you could ask the seller to take back a second mortgage on the property. This would help lower your down payment or get the seller to pay some of the closing costs, perhaps the origination fees. After all this, you could ameliorate the situation by just waiting in the wings, while you begin a savings scheme.

Do you have insufficient income? Lenders will refuse your loan application if they find that the mortgage payment on your property exceeds 28 percent of your monthly gross income. In addition, if your total debt including mortgage payments and other installments exceed 36 per cent, you stand to be refused. The figures are higher for FHA loans. But the situation can improve for you if your credit card record is good and you can prove that you already are carrying a huge household expense including rent or mortgage payments, perhaps your lender will swing his decision in your favor. This is just why you need to make a clean breast of your income and expenses while making an application.

Up to your eyes in debt: Often, lenders don”??t reject applications solely because of the amount of debt they carry on their heads. It is also the many credit cards they possess and revolving credit accounts with proof of rising account balances that come close to the limit prescribed. Such information is detrimental if you are out to prove your creditworthiness. To remedy the situation, you will need to pay off as many of your debts as possible and then reapply for a loan.

Poor credit history: What can be more devastating than to have your loan request turned down due to a history of poor debt repayment habits? If your lender sees that you have a history of making late charges often, owing amounts to the bank or insolvency, he”??s hardly likely to pass a loan application for purchase of property. Your lender is surely not going to be tolerant of a bad credit record. Even if you have had a low loan-to-value ratios and debt ratios, you cannot wipe out a history of poor credit.

Rejection is not the end of the world: Just because a lender rejects your loan application doesn”??t mean you can never own property in all your life. You can take corrective steps to improve your chances of acceptance. But if you work steadfastly at it, you can work a way round your problems. Find out why your loan application was rejected and work towards loan acceptance.

Mortgage delinquencies and foreclosures are increasing all across the country, especially in the highly volatile California housing market. Low income families that took out higher interest mortgage loans specifically designed for subprime borrowers are at the greatest risk.

As the mortgage industry became more competitive over the last ten years of rising home prices and record low interest rates, loans made to subprime borrowers – people with weaker credit ratings – suddenly became a billion dollar industry. In 1994, less than 5% of mortgages were at the subprime level. But by 2005, these loans accounted for over 20% of the market.

But the housing market is cooling off. Interest rates recently inched up and home prices are experiencing record breaking depreciation. The result? Many industry experts are concerned that too many borrowers are at risk for default. And they’ve got good reason.

Too many people took out loans with adjustable rates, interest only payments, balloon payments and other nontraditional mortgages. As interest rates and energy costs have risen, many of these borrowers are now facing serious challenges making their monthly payments.

Some experts are even concerned that an increase in foreclosures could threaten the country’s banking system. William Longbrake, a senior policy advisor to the Financial Services Roundtable, believes, “The worst is yet to come…. The bottom is probably still many months ahead.”

If you are or think you are going to have trouble making your monthly mortgage payments, don’t despair. There are things you can do to prevent foreclosure, but you must act immediately. Don’t wait.

Contact your lender right away and have an open, honest, conversation about the details of your situation. Lenders are not in the foreclosure business. They are willing to work with you and do what they can to help you keep your home. But the longer you wait, the more difficult the conversation will be.

In other future blogs, we’ll take a look at what you and your lender can specifically do to help prevent foreclosure.

If you’re considering a second mortgage home equity loan, watch out for Mortgage fraud. Mortgage fraud is one of the fastest growing white collar crimes in the country, adding to over $1 billion a year in losses.

Aggressive lenders often persuade unsuspecting homeowners to participate in their fraud, putting them at risk for fines and/or jail sentences. Their most common prey are sub-prime borrowers – i.e. people with low incomes and/or weak credit ratings.

So, if you want to stay out of jail, watch out for the common warning signs of mortgage fraud. Be skeptical and don’t just automatically believe everything your lender tells you. You don’t want your need or desire for a second mortgage get in the way of your judgment. Play it safe. Double check with your state regulating agency if something smells fishy.

Misrepresenting yourself on a loan application is probably the most common mortgage fraud. Lying on a loan application constitutes mail or wire fraud, which is punishable by fine and jail time. Therefore, don’t ever over exaggerate your income or home value or under report your personal debt on a loan application. Also don’t ever be conned into using an Employer Identification Number or EIN to create a new credit identity. It’s also against the law.

Every line on your application form should be filled by you. Don’t leave any lines blank or allow the loan agent to change any information. Deceitful lenders have been known to add fraudulent information to applications. But, ultimately, you’re signing the form and totally responsible for its accuracy.

In all your excitement and nervousness, don’t let anyone rush you through the closing process. Before you sign the contract, make sure your loan amount is not more than your home’s appraised value and that you’re not being charged any unexpected fees. Also check that your monthly payments are what you expected them to be and that there is no clause that forces you to pay “daily interest” for any reason. In other words, read the small print.

Lenders may also try to sell you credit insurance. They may even imply that purchasing credit insurance is a requirement of your contract. It’s not illegal for them to do this, but it is highway robbery. Credit insurance is very expensive and very difficult to cancel once you sign the agreement. But it is your choice to purchase credit insurance or not. No one can force you to buy it.

One final point. Beware balloon payments that often go along with low monthly and interest only payment plans. Balloons are extremely risky. Many borrowers are losing their homes to foreclosure because they didn’t have a fail-safe plan to get out of their balloon when it came due. So don’t get yourself into a balloon loan unless you know exactly what you’re doing.