Home Loans Out of Reach even for those with Solid Credit

NEW YORK (CNNMoney.com) -- Wall Street's meltdown has put the squeeze on all sorts of lending, and home loans are no exception. Now, even some very well-qualified home buyers are getting turned down for mortgages.

"A lot of good, well-qualified people are being turned away for no good reason," said Mark Savitt, president of the National Association of Mortgage Brokers and a mortgage broker in West Virginia. "The wheels are coming to a grinding halt."

Sometimes the rejections seem completely inexplicable. Long Island, N.Y.-based mortgage broker Bob Moulton had one client with substantial income and assets who planned to put down $1.2 million on a house selling for $2.2 million. For this borrower, a mortgage should have been a snap. But it wasn't.

The hitch: The buyer was a few days late with a single mortgage payment last year when he was away on vacation. That lowered his credit score to 679, which is the reason the lender cited when it denied his loan.

"Just a little ding on his credit report, one late payment a year-and-a-half ago," said Moulton. "Everything else was fine."

Higher rates

Another example comes from Savitt. One of his clients was buying a home for $205,000, putting down 20%. The buyer had an excellent credit score in the mid-700s, and the house was appraised at a little higher than the sale price.

The problem here: The borrower's debt to income ratio would be at about 45 - slightly higher than what most banks like to see, but by no means excessive. And his other risk factors were great.

"The bank turned it down over excessive debt ratio," said Savitt. "That's crazy."

And higher interest rates are making it even harder for borrowers to get a loan. The 30-year fixed rate has shot up in the wake of the financial crisis - to 6.09%, compared with 5.78% last week - making monthly mortgage payments higher as well. That's raising the debt to income ratio for most borrowers, which means more will have their loan applications rejected.

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It used to be that if most of a borrower's qualifications were quite strong - income, assets, credit score and the value of the home itself - lenders would use their judgment to make exceptions if one factor was a bit weak.

A lender might accept a less than stellar credit score, for example, if the borrower was making a big down payment, or forgive a modest income if the borrower's bank account was fat enough.

Not any more, says Alan Rosenbaum, president of New York City mortgage broker GuardHill Finance.

"There are no exceptions today," said Rosenbaum. "If an application does not meet each of the guidelines - and those guidelines themselves have gotten more strict - it's denied."

That means many more people simply no longer qualify for a mortgage.

A numbers game

"I get as many phone calls as I got two years ago," said broker George Hanzimanolis, of Bankers First Mortgage in Pennsylvania, "but I bet you 40% of the people calling in, we can't do anything for, versus 5% a year ago."

And Hanzimanolis say it's gotten worse in the last few weeks. One recent client who had excellent assets and income wanted to refinance his first and second mortgages. The house was valued at $1.6 million, and he was looking for a $1.2 million loan. That's an excellent loan-to-value ratio of 75%; the banks like it to be no more than 80%.

But these days many lenders are anticipating that home prices will continue to fall, so they're automatically discounting every home's appraised value by 10%.

That dropped the value of the borrower's home to $1.44 million, which put him over the 80% loan-to-value ratio. So the loan was turned down.

Things like that make brokering mortgage loans today a struggle, according to Moulton.

"Nothing is making sense. Everything is torture right now," he said. "We're getting things done but it takes enormous effort. You think a deal is vanilla and it turns out to be rocky road."