Sunday, July 21, 2013

Loan or Rental Application 101 - Cliffs Notes

Surviving the Loan or Rental Application Process:

Facing a blank rental or loan application can be intimidating. There you are, wanting a new home, and this invasion of your privacy is staring back at you. Many adults go weak at the knees when they see the Uniform Loan Application Form 1003. Your average Rental Application makes the 1003 form look like a cakewalk. 

Seriously, you don't have to divulge all. Just cover the basics and make a good presentation of yourself. As I tell Homebuyer Education students: "You may feel we are rummaging through your underwear drawer!" The fact is landlords and lenders are sizing you up for their specific risk criteria and there is no other way for them to legally gather what they need, while considering your own legal right to fairness. 

So why the overt scrutiny? 

#1. Your landlord or lender wants reliable, responsible, stable tenants who can demonstrate an ability to pay them on time. 
#2. Your loan officer or property manager wants credible applicants that reflect well on their assessment.
#3. Your underwriter or management firm wants applicants that reflect well on their reputations and company profits long term.
#4  Your landlord or bank will take a big financial loss to their portfolio if you prove not to be so credible or a true liability. They will give the reviewers heck if they are wrong.

In short: everyone's butt is on the line. 

Renters: Put yourself in the landlord's place: you apply as an innocent looking single lady who also has an unmentioned gangland entourage that torches the place after turning it into an Opium den - that's their loss. Hazmat cleanups and legal or financial expense is something every investor fears - believe me they have all had their share of 'bad experiences'. Home owners sharing or subletting rooms are even more at risk if they personally accept someone into their home. Getting my drift? 

Homebuyers: Investors reselling your mortgage on the secondary Wall Street market (think Fannie Mae/Freddie Mac) have even more at stake as evidenced by the housing melt down. They really don't want to be explaining to the likes of Lloyd Blankfein why you strategically walked on your obligation! 

Cliff's Notes: Application 101
Here are some quick pointers for surviving the application process:

1. Identity Information: your Social Security number, birth date and address are absolutely required for the credit and background check.
2. Work history: 2+ years (college transcripts count!) 
3. Income: must be supported - gaps must be explained
4. Residential history - 2+ years on time payments
5. Credit history: a report will be pulled - lenders and landlords get different reports
6. References: offer only credible people who have agreed to be contacted
7. Assets: where you bank or hold your investments - list banks/addresses or advisor.

Sounding scary yet? 
Anyone renting a home will be asked these things if the property is worth living in. If you are borrowing money for a mortgage, the list gets longer and goes deeper throughout the process until you are approved by the underwriter. That can take a few weeks to a month or more. Fortunately, Landlords will let you know within 48 hours usually. 

NOTE: According to Fair Housing/Credit laws you must be informed and sign a form to allow them to proceed. Lots of student dives take their chances and they are more expensive and lower quality due to the higher risk factors. I work with investors all the time so better homes have similar applications. My own clients who rent homes are very thorough and offer lower rent for higher quality tenants. 

When in doubt: explain!
If you are recently employed or rely on a pension or trust fund and don't fit the 'paystub' request, just write a letter outlining the facts. The point is to encapsulate what the reviewer needs to know as succinctly and briefly as possible.

1. Sample letter - Recent graduate applying for rental:

To whom it may concern:

I am a recently graduated student from X university and now teaching full time at X company while completing my graduate degree in X field. My rental references during college are included on your application. I lived my fist two years during college at home with family while attending X community college.

While I do not have extensive credit history or assets, all my accounts are in good standing. I am seeking a stable home to build my career in X city and request a 1 year lease at minimum.

Feel free to contact my references to confirm my character and on time payment history.

Thank you for your time. 
(sign and date with your current address and phone number)

2. Sample letter - Retiree applying for mortgage

To whom it may concern:

I retired from X corporation in X year as an X manager in the X division. My income is derived from personal investments in accounts held at X- bank(s) and with X funds manager, listed on your application.

The proceeds I draw from my accounts are not taxable income, therefore I am not required to file Tax Returns. Nor do I receive pay stubs from other sources. 

Feel free to contact my accountant or financial advisor, X name at X phone number who can confirm my financial standing. 

Thank you for considering my application.
(sign and date with your current address and phone number)

Thin credit or challenges?
Head off any concerns before your report is pulled. Bear in mind, lenders will see virtually everything about your credit history. Landlords and insurance companies get a 'rating' not your full report. Both will be informed of criminal or bankruptcy proceedings which show up as Public Records.

If asked about specifics, you can be more general with a landlord but if you do have collections, your rating will be low - so you may be asked to explain what happened if they give you a chance. If you get that call, be cool: "Yes I was defrauded in 2009 (or closed my business or went through a divorce, etc)  if you would like I can supply support documents to that effect". Don't get into the messy stuff. And don't offer any more information than requested. If they ask for page 6 of your bank account, provide page 6. 

Appreciate that the bank about to loan you $200,000 will verify everything you state about your financial situation, including the legitimacy of your funds on deposit. That's a lot of fun for everyone thanks to the Patriot Act. Just know it's not personal but a matter of national security that your grandmother's birthday check to you for $100 will be verified. She may be asked to sign a letter that you don't have to pay her back. No kidding. 

Income and Assets:
In the case of Rental applications, a pay stub and current employer reference usually does the trick. Self employed and retirees must satisfy they have current resources.  

For a Mortgage application, you must establish you have resources for the next four years. You only need to show funds needed to qualify, not your entire investment portfolio. If you are legitimately not required to file Tax Returns, you may be asked to sign a 'non filing' form IRS 4506-T)

What do do if you are denied:
Should your application fail, you will receive a letter with instructions on contacting the credit agency involved in their decision. Do it and get a copy of the report provided and address any issues that came up. Since 70% of credit reports have inaccurate information you need to know what is reporting and if you can sort it out. These things don't go away by themselves. 

If you need help contact with credit our housing issues, contact a HUD counselor 

That said, the process is what it is for all parties involved. You want the money or the apartment, right? Just smile and think of England! 

All the best!

© 2013 susan templeton