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The likelihood that a mortgage application
will be approved varies widely by bank.
Home-buyer rejection rates ranged from 11% to 34% in 2012
at the 10 largest mortgage lenders, according to data released this month by the
Federal Financial Institutions Examination Council. Those who applied for a
mortgage at SunTrust /quotes/zigman/242272/quotes/nls/sti STI +0.36% faced the
lowest rejection rate—3,831 out of 34,749 applications were denied—while those
at Chase encountered the highest rejection rate, with 26,894 out of 80,036 (a
third) not passing muster. Despite the fact that large lenders sell most of
their mortgages to government agencies, many require applicants to clear hurdles
that surpass federal guidelines, and they do so in degrees that vary by
institution, resulting in confusion for applicants. Home buyers who get rejected
for a mortgage at one large bank could get approved at its competitor—assuming
they know not to give up the search. “It absolutely makes a difference where you
go,” says Stu Feldstein, president at SMR Research, a mortgage-research firm.
Don’t bank on getting that mortgage approved
Number of 2012
home buyers rejected by the top 10 mortgage lenders
*Applications denied for these lenders includes
preapprovals denied
Source for data: Federal Financial Institutions Examination Council
Source for largest lenders: Inside Mortgage Finance
Source for data: Federal Financial Institutions Examination Council
Source for largest lenders: Inside Mortgage Finance
Since the housing downturn, most banks have been selling
the mortgages that they originate to government-backed agencies. These groups,
including Fannie
Mae /quotes/zigman/226360/quotes/nls/fnma FNMA -3.90% and Freddie Mac
/quotes/zigman/226335/quotes/nls/fmcc FMCC -2.08% , set the
minimum guidelines—including credit score, down payment, and debt-to-income
ratio requirements—which lenders must follow when determining whether to approve
a mortgage applicant. Housing experts say if large lenders stuck to that rubric,
they would all have similar rejection rates. They vary widely, however, in part
because most lenders add an extra layer of requirements on top of the federal
guidelines, says Feldstein.
Banks’ additional requirements stem from the housing
downturn when government agencies returned mortgages that banks had sold to them
after borrowers defaulted. This was done on the grounds that the loans were
poorly underwritten or because of other violations. Referred to as mortgage
buybacks, they fell to their lowest level in four years during the second
quarter of this year, according to Inside Mortgage Finance, a trade publication.
But experts say many banks are sticking to their additional requirements to
avoid new losses. “[They’ve made] decisions about whether they want to skate
right on the edge of those guidelines or be in a comfort zone,” says Stuart
Gabriel, director of the Ziman Center for Real Estate at the University
of California, Los Angeles
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