Sometimes, it's not getting the mortgage approval that's so tough. It's keeping the approval.

Short Sales Are Slow To Close

Unless you're applying for a conventional mortgage or going FHA, getting to the closing table can take up to 2 months, depending on the speed of appraisal, bank signoff, and other factors.

It's especially bad with short sales, foreclosures and short refis.

During those 60 days, a lot can happen to a person that changes their underwriting disposition.  For example, one could lose their job, get injured, or have a home damaged by storm.

And, the more time there is between application and closing, the more likely a catastrophic event is to occur

Of course, catastrophe tends to lead to a mortgage turndown and,  sometimes, bad things just happen.  However, there are things that you can plan for; things within your control.

Good Behavior Matters in Mortgages

Mortgage approvals are fragile, living things and nothing's done until it's done. Good behavior matters.

Keeping that in mind, here are 8 things you should absolutely not do between the date of application and the date of funding.  I've been doing this long enough that I can say with certainty: Ignore these rules at your own peril.

Bad Mortgage Behavior, Defined

1. Don't buy a new car or trade-up to a bigger lease
2. Don't quit your job to change industries or start a new company
3. Don't switch from a salaried job to a heavily-commissioned job
4. Don't transfer large sums of money between bank accounts
5. Don't forget to pay your bills -- even the ones in dispute
6. Don't open new credit cards -- even if you're getting 20% off
7. Don't accept a cash gift without filing the proper "gift" paperwork
8. Don't make random, undocumented deposits into your bank account

Now, it may be impractical to have follow every rule to the letter.  I know that.  For example, if your car lease is expiring,  you have to do what you have to do.  But before renewing the lead, check with your loan officer to see if renting a car for the short-term would be a better solution instead.

It may prove more costly today, but it could be much, much cheaper over the next 30 years of your mortgage.

The same goes for accepting cash gifts from parents.  There's a right way and a wrong way to accept a cash gift and doing it the wrong way may preclude your ability to use the gift as a source of downpayment.

Tread Carefully And Keep Your Credit Scores High

There are a bevy of "gotchas" in Mortgageland and with underwriting times getting longer, it's more likely that the average applicant will trip into one.

Following these 8 rules, though, is a good start.

In a regular, quarterly questionnaire, the Federal Reserve asks the nation's banks whether "prime" residential mortgage guidelines had tightened over the last 3 months.

The most recent survey holds some good news for homeowners.

Since May, just one-fifth of the Fed's responding banks said mortgage guidelines had tightened.  This number is dramatically less than last quarter's results when the survey posted a 50 percent figure.

It's just one more sign that banks are warming to the economy and that may portend the end of the recession.  Although, to be fair, banks "not getting tighter" is definitely different from banks getting looser.

Don't expect banks to lift the last two years' restrictions just yet.

Since guidelines started tightening in earnest circa-2007, borrowers face a plethora of new hurdles:

• Minimum FICO scores are higher by 120 points at minimum
• Home buyers need larger downpayments and/or equity percentages to qualify
• Debt-to-income ratios must be lower
• Employment tenure must be longer
• Banks demand more assets in reserves, including retirement funds

Additionally, getting a second mortgages over 80 percent is a challenge.

As mortgage guidelines go, in some respects, so goes the housing market.  As more Americans pass muster with underwriters, the larger the potential Homebuyers Pool -- a positive for housing -- and the Eligible-For-Low-Rate-Refi Pool -- a positive for the economy.

A lot of analysts believe credit tightening started the U.S. recession in 2007.  It seems only natural, therefore, that credit loosening could help end it.

(Post adopted from Bring the Blog)

Over the past 2 two years, mortgage guidelines have tightened and one of the lasting impacts on home buyers is that it now takes a larger downpayment to buy a home.

It's as true for conventional home loans as it is for FHA ones -- banks want to see more of home buyer's own skin in the game.

Unfortunately, not every buyer has the cash.

This is one reason why -- anecdotally -- the number of home buyers asking for "downpayment gifts"  from family members is rising. With home prices down, mortgage rates low, and a generous first-time home buyer tax credit in place, there's a lot of would-be homeowners that don't want to miss out on the action.

However, if taking a gift of downpayment is part of your upcoming home financing strategy, you need to know that there's a right way and a wrong way to do it.  You can't just deposit your parents' money into a bank account.

Accepting cash for a downpayment is a 3-step process.  Follow the steps to a tee, or expect an underwriter to disallow the gift as a source of downpayment.

First, complete and sign an acceptable gift letter.  There are lots of variations on the "Downpayment Gift Letter" but each follows the same basic format.

• Includes the amount of the gift
• Includes the subject property address
• Includes the relationship of the gifter to the giftee
• States that the gift is actually a gift and not a loan
• Signed and dated by all parties

If you don't have a template gift letter on-hand, and I'll forward you the one I use for my clients.

Next, with the gift letter in place, the gifter should to make an extra strong paper trail for the money being gifted.  This is one reason why certified checks are preferable to wire transfers.  Both are acceptable methods of gifting, but certified checks are easier to document and simpler to prove  -- all it takes is a teller receipt.

Make sure the amount of the gift matches the amount specified on the gift letter.

And, lastly, when receiving the gift, the giftee should be careful to accept the gift as-is.  Deposit it with a live teller in a branch bank and make sure the deposit is not commingled.  If the gift is for $10,000, for example, make a $10,000 deposit -- nothing more, nothing less.  Don't add a random $100 check to the deposit, in other words.

Follow these 3 steps, though, and everything should be fine.

Meanwhile, there might be legal and tax liabilities when gifting funds between family members.  If you're unsure about how donating or receiving a gift might impact you, be sure to talk with your attorney and/or accountant.

As strict as mortgage underwriting has been lately, it may seem that there's a magic formula to getting approved. Truth is, there's not.

Getting approved for a mortgage is the same as it ever was, just with higher hurdles. Satisfy the Mortgage Income-Equity-Credit Triangle and everything else is cream cheese.

The Income-Equity-Credit Triangle is the basis for most mortgage approvals -- conforming, FHA, Jumbo and otherwise.  The more strength that an applicant shows across each of the three elements, the more likely that person is to get approved in underwriting.

The 3 corners of the mortgage approval triangle are:

• Income : The relative strength of monthly taxable income versus monthly household debt.  This is more commonly called debt-to-income, or DTI.
• Equity : The percentage of equity in a home. This is more commonly called loan-to-value, or LTV.
• Credit : The middle of the three credit scores, as reported by Experian, Equifax, and TransUnion.

Now, for every mortgage product on the market, applicants must meet or exceed a series of minimum requirements in order to gain an approval.  These requirements are more commonly called "guidelines" and they've been been dramatically toughened over the past 18 months.

This is one reason why getting approved for a mortgage has been challenging lately. Meeting the minimum requirements is like hitting a target with a bow-and-arrow and the smaller the bulls-eye, the harder it is to score.

Furthermore, the bulls-eye's size varies from loan program to loan program. It's easier to qualify for a conventional 30-year fixed mortgage than it is for, say, the Fannie Mae 5-10 Properties Program.

Whenever the 3 elements exceed minimum requirements -- as shown in the illustration at top -- the "Morgage Approved" bulls-eye is fully visible.  This tells us that the applicant's home loan is likely to be approved in underwriting.

Not every mortgage applicant will show three-category strength, though, and that's okay, too.

Weakness in one of the 3 areas can be compensated for if the applicant can show exceptional strength in the two other categories.  In essence, the applicant's strengths counter-balance his weakness, and a mortgage approval can be just as likely.

In the industry, it's called "compensating factors" and is illustrated by the graphic at right.

Although income levels are less than ideal, credit scores and home equity percentages are stronger-than-necessary, leaving the "Mortgage Approved" bulls-eye in full view.  This applicant's home loan is likely to be approved in underwriting.

Now for that same applicant, if credit scores and home equity percentages are not strong, the bulls-eye falls out of range.  With no compensating factors, on paper, the loan looks primed to default and it's going to be denied in underwriting.

This is illustrated at right.

And, unfortunately for homeowners, mortgage lenders are putting less faith in compensating factors these days than they used to.  It's another reason why mortgage approvals are tougher to come by.

In response to spiraling mortgage defaults, Fannie Mae, Freddie Mac and the FHA all drew lines in the sand with respect to certain minimum applicant requirements.

For example, debt-to-income levels have a "hard-stop" in the 40-percent range.  Anything above that triggers a turn-down.  This holds for everyone -- even the multi-millionaire with 20% loan-to-value.

Hard stops are a cause for consternation among both homeowners because, in some respects, it's like common sense is getting thrown out the window.  "Of course I can repay this mortgage," an applicant will say.  "Look at my bank accounts.  Look at my payment history.  Look at my equity.  I'm the perfect borrower!"

Sadly, underwriters don't care much for that.  A hard stop is a hard stop and the mortgage application will be turned down because the paper file fails to meet minimum mortgage guidelines.

So, in reviewing the mortgage approval process, nothing's really changed over the past few years.  Appraisals are under more scrutiny, income must absolutely be verified, and there's more steps from start-to-finish but the process itself is exactly the same.

The only thing that's different is the size of the bulls-eye.  It's been shrunk.  And trying to jam yourself into the smaller bulls-eye isn't always your best answer.  Oftentimes, there's a better-fitting product with rates just as low.

So, if you're having trouble getting a home loan through underwriting or want to talk about your qualifications, anytime and we can talk about what's possible for you.

Americans refinancing into today's low mortgage rates would do well to watch this I Love Lucy video.  It's an (imperfect) metaphor for what's about to happen in mortgage underwriting offices all around the country.

While you're watching the video, think of:

• Lucy and Ethel as mortgage underwriters
• Chocolates as mortgage applications

As the pace of chocolates picks up, the girls in the Wrapping Department get overwhelmed quickly.  Two people can only do so much.

Relating to mortgages, for every day that rates stay at these low levels, more applications are going to find their way onto the underwriting conveyor belt.  Before long, underwriters will completely backed up and won't be able to approve anything.

So, if you've locked a new mortgage rate since last Tuesday, get your appraisal finished now and your supporting documentation to your loan officer ASAP.  Because most people have yet to do so, if you do, your application will be more like the first chocolate on the belt and less like the last.

Four times annually, the Federal Reserve surveys 84 banks around the country regarding their general lending standards.

One of the survey questions asks about current mortgage lending standards and whether it's getting harder, or easier, to get approved for a home loan.

In the most recent survey, 75 percent of the banks said they're making it harder for "prime" borrowers to get a home loan. 

That means you, Mr. Lawyer. And, Dr. Doctor.

A six-figure income with A-plus credit won't get you carte blanche with the bank anymore.  Lenders stopped fighting over the right to collect your interest payments months ago. 

Today, they're more worried about you defaulting.

The first wave of lender tightening eased into the books earlier this year.  Most changes were focused on the borrower's individual credit characteristics including income, assets, and credit score.

The second wave of tightened, however, has been completely out of the mortgage applicant's hands.  It's collateral -- the fancy bank term for "what your home is worth".  Banks are very concerned about collateral.

Mortgage lenders read the papers, too, and they know that home values are falling or are flat in most neighborhoods.  There's a recovery underway, but it's not going to be immediate. 

Therefore, many banks assume that the 80 percent home loan made today will be a 85 percent home loan sometime in 2009 and having less than 20% equity in a home is not where the banks want you to be -- especially with joblessness on the rise and a loads of unanswered questions about the economy.

For homeowners with jumbo or super-jumbo mortgages, this loan-to-value change will resonate deeply.  Just this morning, for example, one of the country's largest niche lenders dramatically lowered its maximum LTV ratios for prime borrowers. 

Look at how it changes the borrowing landscape for a condo buyer in Chicago with strong income and excellent credit:

• Yesterday: 25% downpayment required, second mortgage permissable for 5%
• Today : 40% downpayment required, no second mortgage permissable

In other markets, where home values are more dubious, like California, downpayment requirements are even higher.

Now, this isn't to say that prime borrowers won't get approved for home loans -- it's just meant to tell the street-level story of what's going on.  There are a lot of people in cities like Chicago or Cincinnati that were first-time home buyers between 2002-2006.  For those homeowners, the only mortgage approval system of which they know is one that's based on them -- the traditional mortgage approval triangle.

Today, it's The Triangle + The Collateral. 

This is why prime borrowers are finding it harder to get a mortgage -- it doesn't matter what you look like on paper, it's what you and your home look like on paper. 

The market will likely to tighten further in the near-term so the best way to prepare for is to ask good questions in advance of your actual needs.  A proactive plan always works better than a reactive one. 

If buying a home or refinancing one is in your plans for December 2008, or January-March 2009, reach out to your loan officer to find out how changing guidelines for prime borrowers can impact you.

Especially if you're a jumbo or super-jumbo borrower.

Four times annually, the Federal Reserve surveys 84 banks around the country about general lending standards and banking conditions.

One of the survey questions asks about current mortgage lending standards and whether it's getting harder, or easier, to get approved for a home loan.

Modified from the report, we see that nearly 80 percent of banks are making it harder for "prime" borrowers to get a mortgage.

This is up from 18 percent a year ago and underscores mortgage lender risk aversion among even the "most qualified" among us.

A six-figure income or impeccable credit is no longer good enough to get you carte blanche with the bank -- you've got to have the complete package and this chart is your proof of that.

Now, some of the areas in which mortgage guidelines are tightening are well-known:

• More thorough income documentation
• Higher credit score requirements
• Larger downpayment requirements

But most of the areas are less well-known and constantly changing.  They includes the dark corners of mortgage approvals, addressing esoteric items such as:

• Investment property cash flow
• Appraised values and comparable sales
• 30-day delinquencies and credit character

And it's only expected to get harder. 

So, if you already know you're buying a home next Spring, talk to a loan officer now and put a purchasing plan in place.  This is especially true if you're converting your primary residence into an investment unit -- more than a few would-be buyers have been burned already by new rules that specifically exclude some types of rental income.

Where 80 percent of banks go, the other 20 percent is likely to follow.  The best way to prepare for these changes is to ask good questions in advance of your actual needs.  That way, you're planning proactively instead of scrambling reactively for additional downpayment at the 11th hour of your purchase.

Let's Start With The Conclusion

If you plan to buy a new home in 2008 or 2009, give a lot of thought to moving up your timeframe. 

Mortgage approvals are about to get more scarce and more expensive for everyone.

The Supporting Evidence From The News

1. FHA is increasing its mortgage insurance premiums and up-front loan fees for a lot of borrowers
2. With IndyMac's demise, other banks should follow and Alt-A loans may go the way of Sub-Prime
3. Fannie and Freddie are in financial crisis again and may be forced to add mandatory loan fees for everyone
4. Banks are doing the unthinkable just to get suspect loans off their books
5. Wall Street is losing its appetite for "guaranteed" mortgage bonds

The Anecdotal Evidence From The Street

1. Lenders have slowed "common sense" exceptions.  Meet the guidelines or else.
2. The new Fannie Mae guidelines are much tougher on high debt ratios
3. Wall Street is scared and rumors are floating about more bank failures
4. The Fed is laying the groundwork for another market intervention.

The Relevant Thoughts From A Guy Who Lives, Eats, And Breathes This Stuff

1. It's an election year so all we're going to hear from now until November is bad news about housing, and bad news about oil prices.  That will weigh on Consumer Confidence and should negatively impact mortgage rates.
2. The purge of the Alt-A mortgage market has been a long time coming and now the window is closing.  Don't get caught watching the paint dry.
3. It doesn't matter how good mortgage rates get if products keep disappearing.

Parting Wisdom

One reason why the markets have been so volatile is because -- about a year ago -- the financial models being used by the banks failed them.  Losses followed and swaths of people got fired, but, in the end, lenders still have to lend -- it's what they do. The show must go on, after all.

So, despite the missing roadmap, the banks have still been trying to make it work.  They're still issuing new loans to mortgage applicants and they're changing their business rules on-the-fly as market conditions warrant.

However, it's dangerous to drive without a roadmap.  Every now and again, one of the mortgage lenders drives right off a cliff.  And each time it happens, everybody else on the road slows down, and that trickles down from Wall Street all the way to Main Street.

Therefore, until the path gets more clear for the banks, life as a mortgage applicant should continue to toughen.  It won't be easier to get a loan in 6 months than it is today so if you plan to buy "sometime soon", maybe "sometime soon" should be upgraded to "sometime sooner".

UPDATE: Listen to a 5-minute radio interview I gave on this post.

The term status quo means different things to different people. 

In England, it's a quote-unquote rock band, for example. In America, "status quo" is something different.  It's an expression often used as an allusion to old and stodgy social mores.  Except in mortgage lending. 

In those circles, status quo is actually a good thing and mortgage applicants would do well to pay attention to it. 

Keeping things the way they are is the best way to make an underwriter smile and not maintaining the status quo is the quickest way to make a mortgage approval can go sideways. 

Now, some influences are outside of a person's control -- changing mortgage guidelines, for example.  But many more are within it. 

Maintaining your mortgage application's status quo can be as simple as following a few basic rules.

Keep your existing mode of transportation

Mortgage approvals consider your total debt obligation and when you buy a new car, you increase your monthly debts. 

Heck, even shopping for one can damage you because some auto dealers check your credit, alerting astute underwriters about the pending purchase. 

Save the shopping and the buying until after the home loan has closed.

Keep your job

Your income and job stability is important to a mortgage underwriter.  Even if you are "trading up" to a better job at a better company, remember that your home loan was pre-approved at your current job with your current income.  You won't get a better interest rate because you're getting paid more.

If you have plans to change jobs, wait until after your home loan closes.

Keep payments on-time to your creditors

When your home loan is being approved, it's not the time to fight with a wireless service provider, insurance company or anybody else that will file a collection against your credit report. 

Even if you don't think you owe them, consider paying your bills because it's usually less expensive to settle than to let it fester.

If you want to stand on principle about debts, wait until after your home loan closes.

Keep your home off the market

Mortgage lenders prefer to lend when they know they'll be collecting interest over time.  Therefore, don't list your home for sale before or during your mortgage approval process.  It's the surest way to have your application denied overnight.

Keep your bank accounts unsuspicious

When lender see large, out-of-character deposits and/or transfer in your bank accounts, they start to ask questions.  A lot of them.  Therefore, if you are depositing gifts and/or transferring monies between accounts, cover your tracks with a detailed paper trail.

If you don't need the money for your closing, don't put it in your account.

Keep your home as-is

Don't start repair work while home financing is underway, or buy big-ticket appliances and/or furniture on credit.  The repair work can adversely impact your appraisal and purchases on credit add to your monthly debt payments.

The mortgage approval process can take as long as 60 days and it's important that the person "on paper" at Day 1 is the same as the person at closing on Day 60.

These basic status quo-maintaining steps aren't the only steps a mortgage applicant should take, but they are a terrific start. 

Well, I just lost this morning's post in a fit of multi-tasking.  Here were the highlights of the original post:

1. The "official" calendar says 26 business days remain in 2007.
2. Today marks the start of Holiday Season in corporate America.
3. It's hard to work at full speed this time of year because it seems everybody else in the world is working at half-speed because of parties and vacation.
4. Therefore, only 17 business days remain in 2007.
5. Three weeks to close a home loan doesn't leave room for the unexpected.
6. Start your home loan approval process this week, or risk not closing until 2008.

Bonus link:  Have trouble making excuses to avoid holiday parties?  Make a good one online.

In nearly three years of blogging, I've only lost one post prior to today.  I would have re-written today's entry, but there's so much time, and so little to do.

Wait a minute!  Strike that.  Reverse it.  Thank you.