1.) Loan-to-Value Ratio – Perhaps the most common problem in today’s mortgage industry is a low loan-to-value ratio. This is the percentage of the loan amount compared to the overall value of the property. For example, if you currently have a balance on your first mortgage of $200,000 and the appraisal comes back with a value of $250,000 then your loan-to-value ratio (LTV) is 80 percent. For a conventional loan, lenders require a minimum of 5 percent equity or a maximum LTV of 95 percent. In addition, any loan over an 80 percent LTV requires private mortgage insurance (PMI).
Of course, the problem is that over the past 2 years many areas of the country have seen properties decline in value by 10 to 20 percent or more causing many homeowners to have a high LTV ratio. Even if they are under 95 percent, many homeowners still find themselves having to settle for higher interest rates, PMI payments, or both. That is why it is absolutely critical to know the appraised value of the home before applying for a mortgage. The simple reason is that appraisals cost money. Most lenders will charge $375-$425 for a basic single family appraisal and this cost is non-refundable. So, if the value comes in lower than expected (and today many do!) the homeowner could risk losing their money and never being able to close on the loan. So should you check Zillow? Yes, but don’t rely on it 100 percent. Recent statistics have shown that Zillow has been within 10 percent of appraised values less than 50% of the time. In other words, 50% of the time Zillow is off by more than 10% and 24% of the time Zillow is off by more than 20%! Therefore, a crucial step for all homeowners to take before applying for a mortgage is to get an expert opinion of value from a real estate professional.
2.) Credit Report – The second most common reason why mortgage applications get denied is a problem with the borrower’s credit report. A lot of attention is paid to the FICO score, which will need to be at least 620 with most lenders and over 720 to get the best interest rates. However, more frequently and less obvious are issues regarding open collection accounts. The scary part is that most of the time, people do not even know they exist. Very often medical collections show up on credit reports without the applicant having ever been notified by the medical company or their insurance company.
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