Gone is the notion that lenders issue mortgage loans by going to their vaults and handing out money for homes. Remember in the movie ‘It’s a Wonderful Life’ when there was a bank run and after all that was said and done, they still had a dollar left? That’s not the case today. Instead, lenders rely on an established line of credit. When that line of credit dwindles down, those issued loans are then sold. Sold to who? There are buyers in what is called the secondary market. After all, if lenders couldn’t sell loans, before too long they’d run out of cash.
But there are requirements these loans need to meet before a sale can be made. Lenders can sell individual loans, or they can combine a bunch of them to be sold ‘in bulk.’ For example, they must meet certain limits, such as in amount. Other factors can play in, but these are requirements before the loans can be sold. There’s no getting around them. If a loan doesn’t meet the requirements, it stays with the lender. That’s why lenders approve loans using the very same set of standards.
Then there are what is known simply as ‘guidelines.’ These are standards that individual lenders set. The loans must still meet the initial requirements, but lenders can add their own little twist.
For instance, one lender might limit a debt ratio. The debt ratio is represented as a percentage of overall debt compared with gross monthly income. One lender might have a debt ratio limit of 43. The 43 means total credit debt cannot exceed 43% of the total monthly gross income. While the loan might meet standard minimum requirements, a lender can impose its own. For the very same scenario, another lender might place the limit at 45 while another can limit it to 38.
What this means for consumers is that just because one lender turned someone down because their debt ratio was at 38 but the applicant had a 43, doesn’t mean all lenders will turn down the loan. Lenders can and do impose their own internal guidelines. The same with loans that ask for credit scores. Lenders can set their own standards.
If you’re having trouble with your lender for any reason, ask whether or not it’s an internal guideline. If it is, maybe just talking to another lender is the answer.
