Why does it seem to be so hard to get a mortgage these days?

I am very excited to welcome Tom Popson of Mortgage Network in Westford as a new guest blogger.  Tom has had many years of experience in the mortgage industry and is a friend of Woods Real Estate and helps all of us with our clients.  I know I am looking forward to see what he has to say  (Joan Parcewski – Woods Real Estate)

Anecdotal reports and many media stories warn today’s homebuyers to expect to have a tough time obtaining financing.  We are told that even those with good credit, steady income and substantial down payments might be turned down.  The conventional wisdom is that this is because underwriting guidelines have become too restrictive.  You will even find many people in the mortgage industry echoing this sentiment.  Indeed, when a borrower’s expectations are not met, it is convenient for a loan officer to be able to blame unreasonable underwriting standards.

However, if you look at the facts, lending standards today are more flexible than they were in the 1990’s.  Of course, throughout the first decade of this century there was an erosion of lending standards.  By 2006, layers of risk that seem crazy today were commonplace.  The unraveling of that house of cards is well documented.  And certainly, if you compare today’s underwriting to that of 2003-2006, there is no question that it is much tougher to get financing now.  As well it should be!  However, if your benchmark is 1993-1996, then we have a different story.

There are 3 major components to a borrower profile that are analyzed in mortgage underwriting:  Capability, Cash and Credit.  In the early to mid 90’s the requirements on all 3 of these were more restrictive than they are now.

Capability, as measured by debt to income ratio (DTI), was held to a fairly rigid guideline of 36% of income toward debt service.  Today, with automated underwriting approval, it is common to have a 45% debt ratio approved.  Up to 50% debt to income is not unheard of for a borrower with good credit and reserves.  For FHA borrowers, most lenders will go to 50% DTI and as high as 55% with strong compensating factors.

It is also much easier now to do a loan with a low down payment.  With the exception of the VA program, the era of “No Money Down” has ended.  However, we now have many more options for the 3%-5% down payment buyer than we did when I started in the business in 1992.

Finally, we look at credit a little differently today.  In the early 90’s credit scoring was not widely used.  There were specific and rigid requirements, and many people who today have acceptable credit scores would have tested out back then.

Combine these factors with today’s low rates, and you can see why I disagree with the conventional wisdom that it is too hard these days to get a mortgage.

So why does this perception persist?

There is an excellent article in Forbes Magazine that has some answers.


The author makes a distinction between the “Perfect Loan” and the “Perfect Loan File.”  The “Perfect Loan” is one that pays back on time.  You would expect that this would be the primary goal of every lender.  However it is not.  Because of the rampant fraud and sloppy underwriting that permeated the industry in the 2000’s, all loans are now subject to a much tighter quality control regimen.  If a post-closing audit finds even a seemingly insignificant error, the loan can be subject to re-purchase.  So, even a loan that is paying on time can become a huge loss.  That is why the primary goal of all mortgage lenders today has become the “Perfect Loan File.”

In this area, I would agree that things are tougher now than ever.  Even though the amount of upfront paperwork in terms of pay stubs, bank statements, tax returns, etc. is the same or less than what we needed in the 90’s; and even though technology has made it easier to obtain and transmit documents via, fax, email and web upload, technology has also made it much easier for underwriters and auditors to scour the file for inconsistencies and possible red flags.

We obtain a “FraudGuard” report on every file for the purpose of making sure all data in the file matches public records and other databases.  Throughout the process, there is much more attention paid to making sure that every piece of information is thoroughly documented and that all information is consistent.  For example all addresses and years at residence and employment need to match W2s and other documents.  IRS Transcripts are obtained and compared to the Tax Returns provided by the borrower.

The Forbes article describes the role of the Loan Officer as “The Filter.”  It is his or her job to collect information from the borrower, accurately complete the loan application, collect the proper documentation and set expectations for the rest of the process.  Here is where the trouble begins in many cases.  To be blunt, many loan officers are sloppy and lazy.  Applications are turned in with incomplete or incorrect information.  Rather than asking the hard questions up front to make sure the file is complete, they will push that to the back office.  Rather than telling the borrower that they need all pages of the tax return, they will turn in 2 pages and hope that will be “good enough.”  Rather than getting exact dates of employment, they will fill in a best guess.  They may not check a bank statement for large deposits or a pay stub for deductions such as child support.  Most importantly, many loan officers fail to set realistic expectations.  They will tell the borrower that everything is “all set,” when in reality, the file is far from it.

Even when the Loan Officer does a good job in his or her role as “Filter,” many lenders, especially the large national mega-lenders, are set up as loan factories.  The goal is to process a huge volume of applications, and again, to minimize defects.  This is many times handled at a centralized location with an assembly line mentality.  Many of the employees simply do their tasks and push the file along with little or no sense of the big picture.  With the huge volume of loans, it takes weeks or months for a loan to make it through the process and finally get to the decision maker’s hands.  It is only then that flaws in the initial intake and processing are discovered.  By the time these flaws are corrected, many times documents have aged to the point that updates are needed and the cycle begins again.  This is when frustration takes hold of all parties.

When you combine a weak loan officer with a bureaucratic loan factory, you have a recipe for disaster.  This is the source of many of the horror stories about perfect borrowers not being able to get financing.  The point is that these borrowers are probably not having trouble because they don’t qualify under current underwriting guidelines.  Instead it is more likely that the lender is inefficient in documenting that the borrowers do indeed meet the guidelines.

A good mortgage company functions as a well-oiled machine.  The loan officer, processor, underwriter, closer, and post-closing QC person all have to do their jobs well and work together as a team.  I strongly believe that this is difficult if not impossible in a centralized processing model.  I have worked for many types of lenders over the years.  From experience, I will say that bigger is not always better.  And when it comes to processing, local is always better than out of state.

There are a lot of mortgage lenders out there that do a good job.  Unfortunately there are some large, high profile lenders that do not.  Of course it is the latter that gets all of the attention.

To be sure, the current quality control and regulatory environment is challenging.  Things don’t always go as smoothly as we would like.  But if the borrower has sufficient capability, cash, collateral and credit, and if they are dealing with an experienced loan officer working for a good lender, there is no reason that today’s underwriting guidelines should stop that borrower from obtaining a mortgage.

Thomas A. Popson

Branch Manager/Loan Officer

NMLS #441848

Mortgage Network, Inc.

239 Littleton Road

Westford, MA  01886

Corporate NMLS #2668

Massachusetts Licensed Lender & Broker MC2668

Licensed by the New Hampshire Banking Department

Direct: 978-399-1341

e-fax: 877-535-2375

Mobile: 978-302-0657




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