Why Loans Are Still Hard to Get

In the early days, if you wanted a mortgage loan, you had to have a job, some down payment money and good credit. While that's still true today, loans are more difficult to get.

Lenders look for more information about you,  making the process take longer than it used to. If you're wondering why, the reason is buy backs. A buy back is a loan that the lender originally issued and then sold to another lender, mortgage servicing company or to Fannie Mae or Freddie Mac.

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If the borrower defaults on their loan, lenders want to know why.  Fannie and Freddie look to see if there was a problem in underwriting or something fraudulent about the loan that contributed to the borrower's default. If so, the lender could be forced to buy the loan back.

Explains David Reed, author of Mortgages 101, "When a mortgage company makes a home loan, it doesn't pull money out of its savings accounts, but instead utilizes a credit line from which it draws. The lender approves a loan, draws down its credit line by $300,000 to issue the mortgage. If a lender does this several times a day pretty soon that credit line would start to look a little thin. When a lender needs to replenish its mortgage coffers, it sells the loans it has already made to other lenders."

There are specific purchase agreements between lenders who buy and sell loans. These are called conforming loans, because the loan must meet certain criteria to be eligible for purchase by a secondary party. It can't exceed a certain amount, may require a minimum down payment and the credit scores of the borrowers may not be below 620, for example. That way lenders who buy loans don't have to re-underwrite a loan that's been certified by the original lender as a "sellable" mortgage, says Reed.

To avoid any potential buy back, lenders today are asking for more documentation than previously required, or asking that borrowers meet stricter credit terms than those required for conforming loans. The result is that lenders are taking more time to close loans.

Reed points out that if one were self-employed, the underwriter would ask for maybe one year's tax return. "Now, two years returns are required, and even three years, if the underwriter feels uncomfortable with a loan," he says.

The bottom line for borrowers is be prepared to offer more documentation and for the purchase transaction to take longer. That doesn't mean the lender is going to decline the loan.

In fact, one way to look at the situation is that it's an advantage for borrowers. It may be tougher to get a loan, but it's also going to be tougher to default.