NEW YORK (MainStreet) – Homeowners of the past would drool over today’s low mortgage rates, with the 30-year fixed-rate loan averaging a mere 4.2%. But there’s a catch: Qualifying for a loan was pretty easy in the old, pre-crisis days; these days, it’s an uphill battle.
So how do you know if you can get a loan today? No one wants to spend hundreds on a loan application only to be turned down.
The Internet abounds with maximum-loan calculators, but unfortunately most are too simple to fully account for today’s tougher underwriting rules. The typical calculator uses standard ratios to figure how much one could borrow with a given income, interest rate and debt load. But in real life a lender will also look at the applicant’s credit history. A bankruptcy or foreclosure will nix your application, as will a credit score that is too low.
Now a new calculator on The Mortgage Professor website adds these factors to the mix, potentially saving prospective borrowers from unnecessary costs, wasted time and sleepless nights.
“One major difference between the housing finance system today and the system that prevailed prior to the financial crisis is in loan underwriting – the set of rules and procedures governing who is approved for a loan and who is rejected,” says the site’s provider, Jack M. Guttentag, an emeritus professor of finance at the University of Pennsylvania’s Wharton School.
The new calculator can help borrowers identify weak points that could be addressed before going to the expense and trouble of applying for a loan, such as a credit score that could be improved, Guttentag says.
Like most mortgage calculators, this one includes basic questions on the property’s location, whether the loan is for a purchase or refinancing and whether the property will be a primary residence, second home or investment. There also are standard questions about the property’s value, the required loan amount and the user’s dependable income and monthly debt payments
But there also are three questions most loan calculators do not ask that The Mortgage Professor’s calculator does. The first asks the user to select from among five options regarding bankruptcies, ranging from never having had a bankruptcy to having one currently under way to having one discharged more than 48 months ago.
Next is a question on the user’s foreclosure history. Again, there are five possible responses, ranging from no foreclosures to one completed more than five years ago.
Finally, the user inputs their current FICO score.
No online calculator offers a perfect prediction of what will happen to every loan application. But this one incorporates the latest underwriting rules from Fannie Mae, Freddie Mac and the Federal Housing Administration, three organizations that supply or insure most mortgages issued today.
Guttentag notes that even if the calculator shows the applicant should qualify for a loan, other factors could get in the way. A lender, for example, may not feel that the applicant has adequate income documentation. The lender may use a different source for the credit score, resulting in a lower figure. Or a specific lender might have tougher payment-to-income ratios than those used by Fannie, Freddie and FHA.
Still, more knowledge is always better than less. Anyone planning to apply for a mortgage under today’s tight rules should spend a few minutes getting the most up-to-date insight into the prospects for being approved.