Turned Down for a Mortgage Due to My Credit Score

Reader question: "I was recently turned down for a mortgage loan due to my credit score being low. The lender did not give me much more information than that. I was wondering what I should do in this situation, in order to get approved down the road."

This is a pretty common question we get from readers. Fortunately, it's also pretty easy to answer. First, you should understand that a credit score is one of several reasons you could be turned down for a mortgage loan. Yes, it's one of the most common reasons, but there are some others we need to talk about.

When someone gets turned down for a home loan, it's usually due to one of the following factors:

• The borrower's credit score is too low.
• The borrower's income is too low, relative to the amount they're trying to borrow.
• The borrowers are carrying too much debt, relative to their income.

If you have one or more of these things going against you, there's a good chance you'll be turned down by the lender.

Turned Down Because of Bad Credit

In your case, it seems that your score was too low for the lender's underwriting guidelines. So, what can you do about the situation? First off, you should ask the lender for more details. They may not give you any more information, but it never hurts to ask. I would want to know if I was turned down solely because of my credit score, or if there were other factors involved. This is the only way to know what you need to work on.

Secondly, if you were turned down for the mortgage based on your credit score alone, you should ask how far out of bounds you were. Ask the lender what their general guidelines are for mortgage approval, and ask what score they require to get the best interest rate. These are two different "brackets," so you want to know where you stand in relation to both of them. You will need a certain score to get approved for a loan, and you'll need an even higher score to get the best rates the lender has to offer.

But first things first. You want to know why you were turned down for a mortgage loan by this particular lender. If i was your credit score alone, then how far off was it, based on their guidelines? If there were other factors involved in their decision, what were they?

Lastly, you should keep in mind that every lender has different underwriting guidelines. When I refer to these underwriting criteria, I'm talking about the specific guidelines they have within their own company to determine whether a borrower is qualified or not. These guidelines determine if someone will be turned down or approved for a mortgage, but they do vary from one company to the next.

Based on these differences in underwriting procedures, it's hard for me to say exactly what score you will need to get approved for a loan. But I can give you some average numbers:

• If your score is higher than 650, then there's probably a lender out there that's willing to work with you. In that range, you may get turned down for mortgage by one lender, and then end up getting approved by different lender.
• The higher you can boost your score over that number, the better your chances are getting approved across-the-board.
• If your score is 720 or above, and you have everything else going for you in terms of mortgage approval, then you probably won't have any trouble getting approved for a loan.
• In order to get the best interest rates a lender has to offer, your score will need to be even higher -- probably 750 or above.

Now you can see what I mean when I refer to different qualifying "rackets." Just keep in mind that these numbers are averages, and not written in stone.

So let's sum up some of the key points we've discussed. You can be turned down for a mortgage loan based on several factors. This can happen when your credit score is too low, or when you don't make enough money relative to the amount you want to borrow. In other words, if the mortgage is just beyond your financial reach, you're going to get turned down for the loan. Some people get rejected by lenders because they are carrying too much debt, relative to their income level. This is referred to as a debt-to-income ratio, and it's one of the key qualifying factors used by lenders today.

Lastly, let me remind you to follow up with the lender and ask why you were turned down for this particular loan. Try to get as much information as you can from them. It's in their interest to provide these details, because it helps you make improvements wherever needed. Then, later on, you might end up applying for a loan through that same lender. So they will get you business in the long run.

I hope this helps you out some, and I wish you luck with your future endeavors.

Behind on Mortgage Payments - Questions About Repayment Plan

Reader Question: "We bought a home 3 years ago. After 7 months of paying mortgage we lost our income for a few months and fell behind on our mortgage payments for a month. We called our lender repeatedly to address the problem, sometimes being put on hold for an hour. We were not allowed to make a payment on the loan until the repayment plan was finalized, which put us behind on our mortgage payments by 3 months! Our lender put us on a 24-month repayment plan. We have been paying an additional $500 a month on top of our current mortgage. We have 6 months left."

"We thought we were going to find income again in the same state as our new home, but that's not in our future. We need to relocate to the state which offered a permanent job position We are now paying rent in the new state, and mortgage payments in our home's state, which is just too much. I've been reading in detail our mortgage/title paperwork and have a few questions I hope you can answer..."

Can we sell our home while under lenders repayment plan?

The lender is the primary lien holder in this situation. So in order to sell the home, you would have to do one of two things. You would have to pay off your full mortgage balance at the closing (even if it means bringing a check). Or you would have to sell it for less than what you owe, and continue the repayment plan until you've paid off the balance. You would need your lender's approval to do the second option. A lot of it depends on how much you can sell the home for in the current market.

Of course, your current agreement may void everything I've just said. If your repayment agreement says you need to keep the mortgage for a certain period, then you're stuck with it for that period. I cannot speculate on such details, because I don't know what's in the paperwork / agreement.

If yes, are we penalized at time of sale?

Once again, this is a question that can only be answered by your lender, or by reading through your agreement. You are in a unique situation, so there could very well be some prepayment penalties in place.

Are there any penalties for selling our home after only 3 years of being there?

See previous response.

Should we find a home in current state first, then sell our home or vice versa?

If I were you, I would not take on another mortgage until I figured out what to do with the current home and mortgage. You might end up with two mortgage payments, and unable to sell either house. That's a bad spot to be in. Many people have been bankrupted by that exact scenario.

Are there any credits we can apply for being that we have to relocate due to employment?

I'm not aware of any tax credits for such situations. The only credit being offered right now is the one for first-time home buyers. But you might want to read this article about behind behind on your payments, since it offers more information on the subject.

I hope that helps you out some. Good luck.

What is an Interest Rate Cap for ARM Loans?

Reader Question: "I am buying a home soon and I plan to use an adjustable-rate mortgage to pay for it. I'll only be in the home a few years. Can you tell me about interest rate caps on ARM loans, and how they work?"

The primary difference between a fixed-rate mortgage and the adjustable-rate mortgage (ARM) is that the rate on an ARM loan will change over time. For example, with a 5/1 ARM, the interest rate will stay the same for the first five years, and then it will adjust or "reset" once a year after that five-year period.

More often than not, the rate will increase when it resets (because average interest rates tend to rise over time). This means the size of your monthly mortgage payment will increase as well. This is where interest rate caps come into the picture. As the name implies, a cap will limit how much the rate can increase during the adjustment / reset. So, in essence, they are used to protect homeowners from excessive rate hikes.

Two Types of Rate Caps

There are two different kinds of interest rate caps, and you should understand both of them if you're considering an ARM loan:

• The annual interest rate cap limits how much it can change within a given year. This is also referred to as a periodic cap.
  
• The life-of-loan interest rate cap limits the maximum (and minimum) rate you can pay for as long as you have the loan. This is also referred to as a lifetime cap.
  

Here's the most important thing you should take away from this lesson. Some ARM loans do not have interest rate caps at all. And for the loans that do have caps, they can vary quite a bit. So if you're choosing an ARM, you need to ask plenty of questions and read all of the fine print. You need to know (A) if there's an interest rate cap on the loan and (B) exactly how the cap works.

You should also ask the lender to show you how much your monthly payment could increase at each adjustment point, based on the maximum increase allowable under the cap. It helps to see an actual dollar amount that might be incurred each month. You need to know the maximum payment you might be facing after the adjustments.

I hope this answers your question about interest rate caps and ARM loans. Good luck with your home purchase.

Home-Buyer Tax Credit May be Extended, Increased to $15,000

Financial lobbyists are pressuring Congress to extend the first-time home buyer tax credit program, and also to increase the credit amount from $8k to $15k.

If you're in the market for a new home, you've probably heard about the tax credit for first-time home buyers. It's a credit for up to $8,000, and it applies to just about anyone who hasn't owned a home in the last three years. It's part of a larger stimulus program designed to get more home buyers into the market, and thus stimulate the real estate market as a whole.

The problem is, the tax credit program is currently set to expire at the end of November 2009. But the program may soon be extended -- and expanded the same time. It's not certain yet, but everything I'm reading suggests that the tax credit may be renewed. I'm also hearing talk that it may be increased to $15,000, instead of the current $8,000 limit.

Several groups are pressing for these changes to the first-time home buyer tax-credit program. Both the Mortgage Bankers Association and the National Association of Realtors are pushing Congress to extend the program, and to increase the credit amount to $15,000 across the board.

Other groups are less enthused about the renewal of the tax credit program. Many economists, for example, point out that this kind of government simulation of real estate markets is what led to the housing crisis in the first place. According to a June 2009 article in Business Week, people with government-subsidized down payments are twice as likely to end up in foreclosure. Essentially, this is what the tax credit program is, a form of government subsidy for home buyers.

Regardless of political and economical differences, we will continue to track these developments in the Congress. I'm usually not one to make predictions on this kind of thing. But frankly, I'd be surprised if the home buyer tax-credit did not get renewed. As for the increase to $15,000 ... well, you can flip a coin.

Income Limits on First-Time Home Buyer Tax Credit

Reader Question: "I am looking for help with a question on the 1st time home buyer tax credit... My fiance and I are buying our first home. We are scheduled to close Oct. 23, 2009. My income is exceeds 75k however her income is in the 40k range. Together our incomes are well under 150k. Individually she would qualify for 100% of the tax credit but because of my income I would not. Jointly we would qualify for 100% of the tax credit but since we are not married I don't think we can file jointly, right? We are scheduled to get married in the Spring of 2010, will we have to secretly elope to get this 8k or is there some way around it?"

That's a good question. I guess it depends on whose names are on the mortgage. Yes, you have to be married to file a joint tax return. If your fiance's name is on the mortgage, then it seems that she would qualify for the tax credit (based on her income). That's really a tax law question, so I can't offer much insight.

Here's what the IRS website says: "The credit is reduced or eliminated for higher-income taxpayers ... For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000. This means that the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less."

The part that "phases you out" is the 75K income limit for single filers. Depending on your income, you might be eligible for a portion of the credit, but not all of it. But I would imagine that only one of you could claim the credit for the purchase.

I would read through the marriage and income scenarios on this page of the IRS website:
http://www.irs.gov/newsroom/article/0,,id=206294,00.html

Disclaimer: I am not a tax professional, nor do I work for the IRS. So I'm certainly in no position to offer advice on filing a tax claim program as confusing as this one! Anyone with questions about income limits on the home buyer tax credit should refer to the link provided above.