If you’ve been turned down for a mortgage by a mainstream bank — as many people have with the much-stricter rules now governing credit scores, income requirements and loan-to-debt ratios — a community bank may be a good option for you.
The new Qualified Mortgage (QM) guidelines, which the federal government imposed on lenders in January, tightened already stringent rules introduced by the Dodd-Frank law and Consumer Financial Protection Bureau.
The QM rules established a lower debt-to-income ratio — the amount of monthly income borrowers must have over and above debt payments has risen to 43 percent from 38 percent — making it much more difficult for first-time buyers as well as anyone with a non-standard financial profile to qualify for a loan. That means a buyer would need either less debt or more income than before.
But local community banks are in a better position to set their own guidelines, which might make them a better alternative for borrowers who don’t qualify for loans with mainstream banks.
Many local community banks can offer flexibility in their underwriting guidelines through in-house loans called portfolio loans.
Michael Ahearn, senior vice president of residential lending at Congressional Bank in Bethesda, refers to this type of lending as taking a “common sense” approach. Lenders consider other factors they deem important rather than merely following a strict set of guidelines.
Ahearn said that among the first questions he asks a potential borrower are: Who is he? What plan does he have for advancement? How was he referred to the bank?
The answers to these questions help establish a relationship beyond a one-time transaction.
Community banks may consider what type of job you have, and be willing to look at your current year’s income — rather than just basing their criteria on previous earnings. And since they are located in your local town or area, they are aware of certain factors that a large, out-of-state bank might not take into consideration.
For example, they may know the neighborhood, the street the property is on or even the very house that you want to buy. They will be familiar with the proximity to good schools, local employment opportunities, freeway access or environmental conditions of the land.
You will, of course, still need to have an acceptable credit score that shows a record of making payments on time — even if you hold a lot of debt — because the consistency of making minimum payments is what counts. You need to show that you don’t spend in excess of what you can afford and are responsible about using what funds you do have.
To find a local bank, it’s a good strategy to select a local realty agent — the most active and well-regarded in the community you can find — and ask him or her to recommend a community bank. Ask your neighbors, friends, architect and even builders in the area about which bank in the community they may have used in the past.
Request the name of their loan officer and ask if you can use his or her name as a referral.
There are nearly 7,000 community banks in the United States, with more than 50,000 locations to choose from. If you don’t have personal contacts in your area, you can find one by logging on to www.icba.org/consumer/BankLocator.
Do your best to establish a personal relationship with a loan officer, and then approach your first meeting like a job interview. Put your best foot forward and sell yourself (as well as your prospect for future financial advancement, upcoming partnerships, promotions, etc).
There are tradeoffs to getting this type of loan.
Be aware that portfolio loans typically have shorter terms than a traditional mortgage — a five- to 10-year term amortized over 30 years — and may carry an adjustable interest rate or even come with an origination fee.
But as a stop-gap measure, they offer a borrower a way to get into a property and provide time to prepare down the road to refinance with a traditional mortgage.
As long as you have an exit strategy, a portfolio loan may be the best possible solution to becoming a homeowner.
Sandy Gadow, freelance writer and author of “The Complete Guide to Your Real Estate Closing,” is a former title officer and licensed real estate agent with more than 20 years experience. Gadow will answer readers’ questions in future columns. Contact her at firstname.lastname@example.org.