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Finding a Home: Easy. Finding a Mortgage: Hard

You’ve heard it on the news, read the “price reduced” signs and seen the foreclosures lining the streets. With the market in distress and home prices dipping so low, one would think swooping in a buying a home would be an easy venture. Unfortunately, nothing could be farther from the truth. Shell-shocked by sub prime mortgages, today’s lenders are keeping the lid tight on their coffers and putting even the most qualified buyers through the ringer to qualify for a mortgage or to refinance.

“Financing has become the single most important factor for home buyers and sellers,” says owner of Palisades California based brokerage firm Amalfi Estates, Anthony Marguleas. “Lenders are changing their guidelines every day and making them more restrictive.” says Marguleas.

Several of Marguleas’s sellers had been preapproved for loans after a 10% down payment. As their closing dates approached, they were informed that the lending requirements had changed and approval would require 20-25% down. Marguleas now requires his clients to present a mortgage preapproval that is no more than a few weeks old. “If they show a preapproval from three months ago, it may no longer be valid.” he says. “If they show a preapproval from three months ago, it may no longer be valid.”

Steve Jacobson is the president of Fairway Independent Mortgage Corporation, a lender based in Madison, Wisconsin feels that perhaps brokers have gotten a bit spoiled from the previous market. “To me, it’s like it was back in the 1980s. When you sat with someone 20 years ago, you had to discuss four things: job stability, cash, credit and income. All four had to make sense for a loan to work.”

If you have a low credit score or are perhaps lacking in the assets department, do not fear. Weakness in one particular area of your application does not mean all hope is lost. The difference would merely have to be made up for in another area, perhaps with a higher down payment.

What do you need in the current market to get approved for the loan you desire?

A Solid Credit Score

What was that old saying?  “Cash is king?”  Well move over, cash. Meet the FICO score. As the real estate boom grew louder and louder, sub prime mortgages became more and more common. Stated-income loans (loans in which no proof of income is required) became commonplace. A.W. Pickel, President of LeaderOne Financial said, “A few years ago, you could get a 100% stated-income loan with a 640 FICO score.”

Such a thing is not the case anymore, which is bad news for people looking to buy stuff they can’t afford or for those folks who are on the cusp of buying that new house, but are edged out by tightening of lender purse strings. Vice President of mortgage research firm, HSH Associates says, “To be a successful borrower today at the best possible rate available, you have to have a FICO score of at least 700 or 720.”

Bruce Brown, president of First Security Mortgage Company points out that “Earlier this month, Fannie Mae issued a directive requiring lenders to adjust loan pricing by 0.5% to 2.75% of a loan’s value based on a borrower’s credit score. Those with scores of 720 or more can qualify for the cheapest rates and no fees. But with scores between 700 and 719, borrowers will have to pay an additional 0.5% of the borrowed amount in the form of a fee or a higher interest rate. That’s an added $1,000 fee on a $200,000 mortgage, or a rate increase that would be equivalent to that amount.  These cost adjustments are done in 20-point increments so if you jump your score by as little as 20 points, the cost savings are significant,” Brown says.

A Big Down Payment

The days of 100% financing are over. A down payment of 5 or 10%? Forget about it. Mortgage insurance providers no longer cover 100% financed loans. The same goes for about 95% of buyers with lower credit scores.   If you’re in the market for a condo, it could cost you even more.  Many mortgage firms require down payments of 20% or more with the additional requirement of bank statements confirming assets that will cover up to six months of mortgage payments.  “The combination of doubling the down payment and requiring reserves has pushed many people out of the market,” he says.

Get Your Paperwork Right

Where just a little over a year ago people walked away with 100% financing on stated income alone, things have gone in the complete opposite direction as of late.  Nowadays, even people with the best of credit scores are put under a microscope to verify their income, assets and other financials.  So when you take your paperwork to the lender, be sure to have all of your ducks in a row.  “Even people who were being treated like the kings and queens of credit before are now being treated like everybody else.” states Brown

Aftermath of Credit Collapse

With the market downturn in full swing and lenders scrambling to pick up the pieces, many changes can be expected in the coming months.  Below are just a few of the biggies buyers can expect to see.

No matter where you go, home values are in the basement and investors are more cautious than ever to fork over cash to banks.  As a result, appraisers feet are being held to the coals to make sure that appraisals are up to snuff.  “You’ve got people who are creditworthy and can get approved for a loan, but the investors may look at the appraisal and deny the loan or make the appraiser jump through a lot of hoops to justify it.”
Explains Bruce Brown.
For example, appraisers are required to show recent sales of comparable homes in the vicinity of the property over the past 12 months.  Recently however, that time period has been trimmed down to as little as 6 months which leads to what some might consider, insufficient data in less dense areas or where few similar homes are available for comparison.
Homebuyers can also expect hikes in fees as more banks are turning to third-party appraisers to make sure the appraised value is accurate.  “We’re seeing, in some cases, anywhere from $50,000 to $100,000 price adjustments,” he notes.  “A property that comes in appraised at $400,000 may come in, after review, at $300,000.”  Says Marve Stockert of Illonois Association of Mortgage Professionals.  With the cost of the review hitting upwards of $250, the cost is often passed off on the buyer as an additional fee.

Re-financing headaches

Many current homeowners are looking to take advantage of the low interest rates and refinance.  After all, if you’re not interested in buying a new home, why not pay less for the one you’ve got?  It sounds easy enough, even if you have never been delinquent on your loan.  It is becoming a common practice for second mortgage lenders to require homeowners to pay off their second mortgage before refinancing.  The reason?  Should a borrower default on their loan, the second mortgage lender gets paid only when the primary lender is paid what they are owed.  In many cases, this leaves secondary lenders empty handed when foreclosures and short sales occur. 

Return of the FHA loan

During the boom, FHA loans were largely ignored due to their low limits, strict appraisals and cumbersome paperwork.  Instead, most buyers went the easy route, that of the 100% subprime loans.  “They were more interested in moving fast and believed the hype out there that prices would keep rising forever and they could re-fi out of it,” says A.W. Pickel.

Presently, with subprime loans all but extinct and the Economic Stimulus Act of 2008 generating phantom cash from tax-payer/Chinese government coffers, FHA loan limits are reaching upwards of almost $730,000.  “Just for that reason alone you’ll see more people doing FHA financing” says Jacobson.  At his firm alone, there has been an 8% increase in buyers taking FHA financed loans.

Most consumers know by now that mortgage rates are approaching all-time lows. With the national average for a thirty-year, fixed-rate mortgage hanging just under four and a half percent, there has never been a better time to buy a new home – or to refinance your home loan on a property your already own. It’s ironic that, when so many people are terrified of losing their homes to foreclosure, it’s easier than ever for consumers to afford their own residences. With rates so low, many consumers are finding that their closing costs are either nonexistent or ridiculously low. In terms of refinancing, the experts say that if you stand to save more than a quarter point, it is worth giving it a try.

In exchange for charging lower fees for reverse mortgages, homeowners seeking one of these “Saver” loans would be eligible to cash in ten to eighteen percent less equity on their homes. This is intended to keep the FHA from losing money the way it has been doing on current reverse mortgages.

There’s a tremendous tendency among homeowners to think that every penny you sink into your home is an improvement that will reap you corresponding equity if and when it ever comes time to sell the property. Too bad that things don’t at all actually work that way. Statistics show that, for every thousand dollars that homeowners spend making their homes “better,” they can only expect to recoup around six hundred dollars. And that’s in best case scenarios.

It’s more bad news for home prices in the state of Ohio, an area of the country hit especially hard by the housing collapse and the continued toils of the Great Recession. A new report from Cleveland showed home prices in the northeastern part of the state taking a veritable nose-dive, right in line with overall U.S. home values that were at a ten-year low. From coast to coast, individual housing markets are painting a very clear picture of just how bad off the real estate situation is.

The bad economy has made all sorts of interesting changes to the American lifestyle. We know some of the biggies – fewer jobs, smaller paychecks, fewer luxuries, the rise of “frugalista” culture, et cetera. Over the weekend, it seems that we discovered yet another interesting effect of the Great Recession. The American birthrate has fallen for the second year in a row. It seems that money troubles have given some U.S. families pause when it comes to starting their families or expanding existing ones.

Almost everyone knows that you can refinance your home mortgage to save some cash on your monthly payments when rates fall (as, for many people, they have at present), but were you aware that you can also refinance your auto loan? Auto loan interest rates are also very low at the moment, even though it tends to be the cost of mortgages that gets all the attention.

According to the U.S. Treasury, two billion dollars from the Troubled Assets Relief Program (TARP) will be sent to the seventeen states “hardest hit” by the real estate crisis. The funds are meant to jump-start programs aimed at unemployed homeowners who are having trouble paying their mortgages. The so-called Hardest Hit Fund was established by President Obama this past winter to support sinking homeowners in those areas of the country plagued by the worst housing and job markets, in light of the fact that most foreclosures taking place these days are being executed on middle-class – read: responsible – homeowners who are troubled because of joblessness. The money is drawn from the fifty billion dollars that Congress approved to spend on the Making Homes Affordable program’s mortgage modification section.

The president is hard at work thinking up ways to overhaul his administration’s tackling of the foreclosure crisis, say experts. Obama is looking to set requirements obliging lenders to lower or eliminate mortgage payments for those homeowners who have lost their jobs. Under the proposal currently being considered, banks would be required to cut mortgage payments to where they accounted for no more than thirty-one percent of the borrower’s income, which is usually equivalent to the amount of unemployment insurance that they qualify for receiving, for anywhere from three to six months.

Mortgage rates are at historic lows, and there is evidence that they will continue to fall in weeks to come. Last week, the national average mortgage rate bottomed out at 4.44%, according to Freddie Mac. Usually in times like these, prospective homeowners and those who already have mortgages would be lined up in snaking queues around the block to attain mortgages and refinancing to get better payments.

Ethics and morality have very little place in real estate. That old axiom had never been truer than in this day and age. I recently read an article in the Denver Post about “buy and bail” homeowners – those who purchase a home when they already own one that is upside-down on equity and considered to be a poor investment – and then ditch the first home. The new home is purchased before the conniving homeowners’ credit scores are trashed by the strategic foreclosure that they plan on executing.