“Buy Backs,” The Real Reason It’s A Challenge To Get A Home Loan
The mainstream media has continued to report that it’s difficult to be approved for a home loan, when in fact it’s the process that has become more difficult, not your ability to qualify for a loan. You may have read that lenders are requiring higher FICO scores, larger down payments, and are routinely denying self-employed borrowers. While there has certainly been a marginal tightening of loan approval criteria, the reality is that the ability to qualify for a home loan is pretty much the same as it has been for the last 20 years.
The one thing that has changed dramatically in the last couple of years is the amount of detailed financial records the lenders are requiring from you, and zero tolerance for what appear to be ridiculously minor issues.
If a guideline states you need to wait 24 months to apply for an FHA loan after your bankruptcy has been discharged, you won’t be approved after 23 months. You’ll have to wait until one day after the 24 month anniversary. If you’ve deposited $517 in cash from the garage sale you held last weekend, the lender will probably require that you bring in a copy of the garage sale ad you placed in the paper along with pictures of the people buying your stuff. And I’m not exaggerating.
Why have lenders become so nit-picky and hounding you for every scrap of paper to document what seem to be very unimportant issues? The industry term is “put-backs” or “buy backs.” Home lenders are being forced to buy back a record number of loans that Fannie Mae or Freddie Mac don’t feel meet their guidelines.
You may not realize this, but even the big banks bundle and sell the rights to virtually every home loan to either Fannie Mae or Freddie Mac right now. They may be collecting your payment from you, but the ownership of the note itself has been sold. In the past Fannie or Freddie typically only forced a buy back once the borrower went into default. But now they are kicking back files to the originating lender for minor variances to guidelines or not properly documenting the file, even if it’s an A+ borrower. And that has lenders running scared because they don’t have enough cash in the vault (even the big banks) to make home loans to everyone who wants one. It is essential to the marketplace that loans be bundled and sold so that those funds can be recycled into more home loans.
Prior to the Wall Street meltdown in 2008, there were lots of private investors who would purchase home loans, and Fannie and Freddie’s market share was only about 50%. In addition, if a loan had a significant guideline or documentation violation, a lender could sell the loan to a Scratch and Dent investor (yep, that is the real name our industry uses for that type of investor) at a small discount. And that discount was a lot cheaper than having to keep a $250,000 loan on the books.
But those private investors are pretty much extinct right now. There is enough uncertainty over government regulations of the mortgage industry to keep the investors from parting with what little capital they have left to invest. As the real estate market and worldwide economy improve, and regulatory uncertainty is resolved, these investors will come back into the market place. But until then just be prepared to give your lender every piece of crazy information they ask for and don’t fight it – unless you don’t want the loan, of course. The lenders are not doing this to make your life difficult or to find a way to deny your loan. They just want to make sure they have a clean file that can easily be sold to Fannie or Freddie without fear of a buy back.
Michael has 21 years’ experience in the lending industry. In that time he’s directly helped over 1,400 families finance the purchase of a new home or refinance an existing loan. Rebecca has a CPA background in auditing financial institutions which brings an incredible resource to First Priority Financial. They are licensed to help families in the states of WA and CA. If you, or anyone you know, needs help with a home loan call 509-252-9151 or send an email to Mike Mullin