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CHAPTER 3. Overcoming Qualification Problems

You are not alone if you have some problems qualifying for a mortgage. As many as 25 percent to 50 percent of all mortgage loan applications do not precisely fit the guidelines described in Chapter 2. For example, the following are common problems:

• Monthly income and expenses – Lenders have very specific requirements on the types of income included for qualification purposes and the kinds of expenses that are counted in calculating ratios. Your income may not meet the lender's requirements, or you may have debts that the lender considers too high.

• Credit history – People have illness in their families, get busy with travel, or simply forget to mail payments for bills that are due, resulting in late payments on their credit report. At a minimum, you almost certainly have to explain any “blemishes” (late payments) that appear on your credit report.

• Property appraisal – Sometimes houses simply cannot be appraised for the amount of the sales price.

• Source of cash for down payment and settlement costs – Funds may come from sources that are unacceptable to traditional lenders.

• Employment history – People lose their jobs, start new jobs, get transferred, and experience all types of other changes relating to employment; these changes may adversely affect the lender's underwriting consideration.

The purpose of this chapter is to outline some of the problems that you might encounter when applying for a mortgage loan and to suggest some possible strategies to overcome them before you apply.

To illustrate how widespread problems from credit ratings alone can be, consider the national statistics in Figure 3.1 regarding types of credit accounts that may be delinquent (30 days or more late) at the end of any given month. These numbers represent percentages of total loans outstanding that are delinquent as of each month. Loans may be delinquent in one month but not the next, so the total number of loans that are delinquent at some time during the course of the term of the loan is likely much higher than these statistics indicate. Also look at the following statistics on repossessions or foreclosures (by which the lender repossesses the secured property for nonpayment of the debt):

FIGURE 3.1 Percent of Loans Delinquent per Month

Percent of Loans Delinquent per Month

• Automobile loans – More than 0.08 percent per month or almost 1 percent per year.

• Mobile home loans – More than 0.11 percent per month or more than 1.3 percent per year.

• Marine financing (boat) loans – More than 0.12 percent per month or more than 1.5 percent per year.

• Mortgages (first lien) – More than 0.1 percent per month or about 1.25 percent per year.

These numbers represent percentages of total loans outstanding that result in repossession during the month. Vehicles may be repossessed more than once if the borrower makes up the delinquent payments, pays towing fees, and so on to bring the loan current. Mortgages in foreclosure do not necessarily indicate that the loan is “foreclosed.” The process is full of legalities and takes several months (depending on the state in which the property is located) to complete. As with repossessed vehicles, loans may go into, and out of, foreclosure several times. Consequently, the number of mortgage loans that end up being actually "taken back” (property repossessed) by a lender is less than the numbers reported.

These numbers tell us that many people have less than perfect credit. In fact, almost everyone has some blemish on his or her credit report, whether because of an item lost in the mail, a forgotten payment, or any number of other possible reasons. This does not mean that mortgage loans are not available; it simply means that you must be more resourceful in presenting your case to the lender.

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