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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.

It sounds like the perfect situation: you buy a cozy little second home somewhere as a vacation getaway, and are able to use it years later as a retirement cottage. Sounds perfect, right? The problem is that, with any investment – and especially with real estate – things seldom work out exactly the way that we wish they would. You need to weigh your risks and go into everything with eyes wide open, knowing that there is a good chance that things won’t work out.

From sea to shining sea in the United States, housing prices have been in a virtual freefall for the past five years. Sadly, we have reason to believe that we still have not seen the end of this trend: per the S&P/ Case-Schiller Property Index, property values fell almost four percent in the year between November 2010 and November 2011 in twenty major cities. One of those was the Big Apple, New York City. There, the value of construction projects is down a breathtaking thirty-one percent (which amounts to a decrease of over six billion dollars) in just the past year, a fall that has cost over forty-five hundred construction jobs.

Washington, DC has long been known as a city that is good to low-income homebuyers, often subsidizing home purchases that these poor people would not otherwise have been able to afford. Unfortunately, that largesse seems to have turned around and bit them in the rear in these days of a troubled housing market. At present, twenty percent – or one in five – of all buyers participating in the city program, which is thirty-five years old, is behind on their mortgage payment, according to city officials. It’s a startling default rate that is no less than three times higher than the overall national foreclosure rate. The Washington Post has determined that nearly fifty buyers received notices of foreclosure in recent years, while over fifty more are behind on either their HOA or utility liens.

Bank of America has included in its program to donate homes for demolition in Detroit, Cleveland and Chicago held sessions for homeowners to meet with mortgage-modification specialists. Five hundred customers showed up in Cleveland, sixteen hundred in Chicago and fourteen hundred in Detroit. Furthermore, BoA competitor Chase Bank has also established a down-payment assistance program for Detroit city employees to move into vacant homes in designated areas, and CitiMortgage held events in several cities last summer where around one thousand homeowners met with officials about mortgage problems.

Talking about costs: the foreclosure crisis is creating tremendous costs for American families. According to numbers drawn up by The Center for Responsible Lending, foreclosures that took place in 2009 caused almost seventy million neighboring homes to lose an average of seventy-two hundred dollars apiece in equity, for a total loss of over five hundred billion in lost value.

Many American cities have made it a goal to move forward with more and more foreclosure demolitions. In Detroit, Michigan, which has arguably the most blighted housing market in America at present, there is a goal to demolish no less than ten thousand structures by the end of next year. To date, some four thousand properties – ninety-five percent of which were residential – have been torn down. The properties often come into the city’s possession by way of either donation, because of delinquent taxes or failure to respond to nuisance-abatement procedures

There are far too many foreclosed properties in America right now; that’s a fact we all know. The volume of foreclosures sitting around right now is a problem, since these vacant houses not only bring down property values in the neighborhoods in which they are situated, but also attract squatters, vandals, and vagrants, all of which increase the appearance and experience of blight. Criminals use them as a one-stop shop for stripped appliances, cabinets, pipes, doors, and windows. They are ugly, often vermin-infested, and are magnets for crime. They require an input of money for taxes and upkeep, which is then stripped away from any potential return coming from the eventual sale of the property. MSN Money puts forward one solution to the problem: let’s demolish foreclosed homes. Yes, you heard right – demolish them. Bulldoze ‘em to the ground, because we’d be better off without them. Allow me to explain.

Property owners in Detroit, Michigan, have discovered a loophole in tax laws that is allowing them to wave bye-bye to massive tax liens, sometimes hundreds of thousands of dollars’ worth, for just five hundred dollars apiece. How is this possible? Well, according to MSN Money, some ethically-challenged landowners are letting their taxed-up properties slip into foreclosure and then buying them back from the county for the low sum of just five hundred dollars apiece. It sounds too outlandish to be true, but it’s astoundingly not. From Detroit there are coming stories of landowners gaming the system to avoid huge amounts of taxes.

Once upon a time, flippers got a pretty bad rap. These investors, who buy homes at rock-bottom prices and then resell them, possibly with some refurbishment in the interim, chase profits. Before the housing crash, when the market was at the biggest point of the bubble, these folks did a pretty good business for themselves. It was so good, in fact, that flippers took a lot of blame for driving prices up, and the government put laws in place meant to curtail those who would quickly buy and resell homes. Thanks to the tragic state of the housing market at present – yes, it is just that bad – flippers are actually getting a bit of a break, courtesy of the Federal Housing Administration. The mortgage insurer took the unusual step of extending a waiver of its anti-flipping regulations through 2012.

I recently read a letter in a financial advice column in which the letter writer asked whether his elderly grandmother, who has a lot of medical expenses, ought to consider a reverse mortgage to help pay her bills. I thought it was an intriguing question, since so few seniors seem to understand what exactly a reverse mortgage is, how it is given, and when it ought to be used.