New Mortgage Tool Can Help Avoid Pain, Cost of Rejection

If there's one thing lenders have learned from the housing meltdown, it's that making high-risk loans entails, well, a lot of risk.

As a result, banks have severely tightened lending standards and increased paperwork requirements. That's made the application process quite a doozy for aspiring homeowners.

Borrowers are now forced to invest significant time and resources into meeting the strict requirements of banks, sometimes staying engaged in talks with banks for an extended period of time only to learn that their loan has been rejected. Occasionally, rejection comes even after prospective borrowers have already paid an appraisal fee or other costs.

But a new mortgage qualification tool could help borrowers avoid this scenario. Perhaps the most sophisticated of its kind, the tool assesses a borrower's loan qualifications based on various factors and determines, lickety-split, what options he or she has to choose from.

The tool guides the user through "something that the borrower doesn't do until he gets to a loan provider and spends some time with the loan provider," according to its creator, Jack Guttentag, a professor of finance emeritus at the Wharton School of the University of Pennsylvania.

Accessible on Guttentag's site, The Mortgage Professor's Web Site, the tool assesses a user's credit-worthiness by crunching data that includes homeownership history, property value, the equity that a borrower owns or intends to own upon buying, and his credit score. The tool also factors in documentable income, debt payments and home location -- all in the hope of providing the user with a full understanding of borrowing options.

If you don't have any options, the tool explains where you come up short, by how much and how to fix it.

Shooting for an FHA-insured mortgage? Improve your credit score and make sure you can muster at least 3.5 percent equity, the report may suggest.

Or want to clinch a conforming mortgage and avoid private mortgage insurance (PMI) payments? The report may suggest that you worry less about your credit score and more about scraping together a sizable down payment -- 20 percent if you're looking to rid yourself of PMI altogether.

Guttentag based the tool's metrics on the specific lending standards of various lenders and general mortgage borrowing rules of thumb.

The tool may be the only one of its kind. That's because banks, says Guttentag, have no interest in "providing any tools or decision-support materials except those that will induce borrowers to come to them." Informing borrowers of their qualifications on the Internet, banks have decided, doesn't help "their bottom line," he says. The logic is that borrowers may easily take what they've learned and use it to apply for a similar loan at a competitor.

In other words, if the bank only reveals to a borrower that he qualifies for a loan during one-on-one engagement, then "the loan originator has first dibs on the deal."

Thus, Guttentag's tool could loosen lenders' clutch on mortgage qualification standards. The service is part of a larger loan origination network that he is developing which is scheduled to launch before the end of the year.

Guttentag has run his website, which offers a trove of articles and how-to manuals on borrowing as well as opinion pieces on market trends, for well over 10 years. He also writes a weekly column for InmanNews.com.