By Douglas Katz – 11/16/2022
Mortgage loan approval guidelines in the lending world are ever changing. Market conditions and risk tolerance of the lenders create an environment where home loan programs are at best tweaked and at worst radically changed to match competitiveness, the market and the lenders appetite. The hard part for lenders and their clients, i.e. you, is that we sometimes do not know how much the loan parameters change or when they do until it is manifest in loan decisions.
This does not mean that we are flying blind, but rather we are driving at night and sometimes need to hit the high beams to see a bot better. When the changes are published changes, good lenders and loan originators are usually on top of the changes and adjust accordingly. When the changes are behind the scene tweaks to their risk appetite and artificial intelligence, its not that easy and a scenario run through the automated underwriting systems receiving an approval on one day can be totally different on another.
This is not a theoretical concept that I am explaining. HousingWire just reported that the Mortgage Bankers Association recently released data regarding the current Mortgage Credit Availability Index (MCAI) fell by 0.5% to a level not seen since 2013. This means we are definitively in a time of tightening credit standards which can and will impact a lot of borrowers.
Concerned, you should be. Not panicked but definitely concerned enough to be vigilant as to be a participant and not a passenger for the process from the initial conversation through every step and milestone. For this particular challenge, however, I do have some tips.
- DON’T PROCRASTINATE – The best way to turn an initial approval into a full loan approval is to get your documents in quickly and completely, as well as answering any requests for information accurately. When guidelines change there is usually some heads up and you can avoid outrunning any grace periods by moving deliberately and managing the process. With changes to the underwriting AI, there is warning if any, but the same strategy is also beneficial. You may not know what changes are coming or when their effective date, but you can still beat changes by getting your loan in quickly.
- UNDERSTAND IF YOU ARE BORDERLINE – Approval is pass/fail but once you clear the hurdle, there is a range. You could be 0.1% above the allowable debt-service-ratio and the loan could die in the cradle. If you are making it by the skin of your teeth, changes, even minor ones, can have a dramatic effect. If, however, you are clearing the requirements by a large margin, there is way less cause for alarm and concern. I still say stay cautious, but unless there is a string of changes in short order that all hurt you, you should be fine.
- STRESS TEST YOUR ASSUMPTIONS – This is an important piece of the puzzle and is essential after you know where you stand. Hopefully, there may only one or two tight attributes of your loan, but there can also be more. You need to know what are the vulnerabilities to your file, how problematic that they can me and the degree of sensitivity. You may not be able counteract all of the issues, but you can work with your lender on contingencies to react if anything does happen.
- CHECK IN REGULARLY – Communication solves a lot of problems and it eliminates some before it happens. Your lender should be in regular communication with you providing updates, guidance, direction and even some therapeutic assurances during a stressful time. Additionally, you should feel very comfortable reaching out to your lender at any time with any question. This one is simple but not easy and you’d be amazed at how many times nobody simply emailed, messages or even called. If you feel in the dark about ANYTHING, rectify it and communicate, especially when credit standards are tightening.
- PICK A GOOD LENDER – This goes without saying but it needs repeating. Not all lenders are created equal and service matters. All I hear all day long is price, price, price. Not to say that what you are paying does not matter. I undoubtedly does, but you can surmise from the background of this article that a lot can go wrong. Is 0.125% from a discount lender worth not getting the loan or panicking when you can have some assurances based on experience, integrity and technical ability. Nobody expects a deal to blow up until it happens and what it does, it can be tragic. Save yourself the grief and look at value not price or, at the very least, value and competence equally with price. You’ll thank me later.
It may have come to a surprise that the mortgage industry and the mechanisms used to approve a loan are complex and ever-changing. Mortgage loan approval is not arbitrary and lenders adjust the criteria to match economic conditions with guidelines. We are presently in a time of tightening guidelines which means a lot of potential peril for buyer sand homeowners, so understanding this and acting accordingly is essential.