Thursday, November 18, 2010

# 1 Reason Loans Don't Close

Most real estate agents have experienced the frustration of a loan falling apart at the last minute. Here's the # 1 reason that happens.

When a conventional (non-government) loan is underwritten, it must comply with three sets of underwriting guidelines: Fannie Mae or Freddie Mac guidelines, the individual lender guidelines, and the mortgage insurance company guidelines. When a deal falls apart, it's probably because the loan originator (the person who is selling the loan) didn't check all three sets of guidelines.

Here's an example of how the additional guidelines might affect a loan:

First set of guidelines is Fannie Mae's. Minimum credit score of 620.

Second set of guidelines is the individual lender's. Minimum credit score of 640.

Third set of guidelines is the mortgage insurance company's. Minimum credit score of 680.

The strictest set of guidelines is always the set that matters, so the minimum credit score is 680.

If the person selling the loan only checked the Fannie Mae guidelines (either manually or by using the underwriting software that Fannie Mae provides) and the borrower has a credit score below 680, they may think the loan can get approved and will write you a pre-approval letter. However, the loan needs a 680 credit score and the borrower doesn't have a score that high, so there really is no deal. It falls apart at the last minute when the person selling the loan gets the bad news from the mortgage insurance company. They will probably tell you that the guidelines changed, but that's not true - the loan originator just didn't check them.

With FHA loans, there are two sets of guidelines: FHA's and the individual lender's. The mortgage insurance guidelines are included in the FHA guidelines.

With VA loans, there are also two sets of guidelines: VA's and the individual lender's. There is no mortgage insurance with VA loans.

How do you protect yourself from deals falling apart? It is super easy. Make sure you are using a lender who knows there are three sets of guidelines. The way to tell is to ask them. If they don't know what you're talking about, dump the bum because you might have a bogus pre-approval letter. If you keep using a lender who doesn't know what they're doing, you are the only one to blame for ruining your business.

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