he Real Story…
News and commentary about the real estate market and related topics.
Dave Parrish, ABR ®, CRSA, CSP, GRI, ePRO ®, REALTOR ®, RealtySouth
The opinions expressed here are my own and don’t necessarily represent those of HomeServices South.
Getting that mortgage is tougher than in the past… but worth it!
If you’ve been in the market for a mortgage recently, you’ve no doubt noticed how difficult it can be to get approved. You’re not imagining it, and it’s not just you. In today’s market the number of mortgage applications that get approved is probably around 30% while just a few years back it was closer to 90%.
Underwriting standards have tightened, meaning that borrowers need higher credit scores, more income and higher down payments. And that’s not all. There are many challenges to financing a home, but the following are especially at issue in today’s market.
1. Higher Credit Score Requirements
Want a loan? You’d better have top-notch credit to get the best deal, or in some cases, to get approved at all. While loans can be had in most cases for credit scores down to 620, they do come with higher rates and/or fees, which means you’ll get approved for less house for the available dollars. Lenders have raised the bar on credit scores. Those low rates you see in news are available only for the best credit. In 2006 a 680 FICO would get you into a house. Now it takes about a 740.
2. Greater Scrutiny of Income and Assets
For all practical purposes, gone are the days of the “No Doc” or “Stated Income” programs. In the past, banks were lax in verifying income and deposits. Now those things have more scrutiny. Home buyers better get ready to prove just about anything on their application. In today’s market lenders have to verify, re-verify and re-verify again. Qualified buyers are now put through the ringer and often turned down because of appraisal issues, property issues or anything that looks strange or questionable.
3. Ever-Changing Borrower Requirements. What it takes to get qualified, pre-approved and actually funded is a moving target. A buyer can have all of the requirements to get pre-approved for a loan under the current guidelines, only to have the guidelines change at the last minute. See last week’s blog.
4. Home Appraisals are coming in Low
Because of slow sales, which lead to fewer comparables and the large number of short sales and foreclosure / bank-owned sales, houses are frequently not appraising for the contract price. Part of this problem can be blamed on the government enacting the HVCC (Home Valuation Code of Conduct), which regulates the appraisal industry in an attempt to curtail fraud. However, the HVCC has proven to be an unexpected obstacle for the real estate market recovery. As a result of the HVCC, appraisals are now often completed by appraisers who are inexperienced and/or out of market appraisers that are unfamiliar with the local markets in which they are performing appraisals. This often results in inaccurate appraisals and unnecessarily rejected loan applications.
5. Fewer Opportunities for Small Business Owners and Independent Contractors
Congress recently introduced legislation that would make “liar loans’ illegal.” “Liar loans” is a term to describe low or no-documentation or stated income loans. Loans of this type have been used by borrowers to obtain a mortgage they didn’t really qualify for. However, these loans were also a valuable tool for many honest people who are either non-U.S. citizens or self-employed and therefore don’t receive regular paycheck stubs or have a simple, straightforward way to prove their income to lenders. Typically, small business owners pay themselves a minimum amount to avoid paying payroll taxes while reinvesting profits into their businesses. Banks will no longer make exceptions for circumstances like these and turn many loans down that previously would have been granted.
6. Condo Purchases Face Additional Tests
Condo loans are much more difficult today than in prior times. In today’s market not only must the buyer be approved but also the condo building… meaning that the condo association’s cash reserves, owner occupancy rates, low delinquency rates on monthly assessments and more must be documented and verified. Additionally, the FHA recently changed the condo approval method, which has further inhibited many buyers who only qualify for FHA loans. If looking for a condo and wanting to use be sure to ask your lender for the list of approved Condo in the target market area.
Becoming a homeowner
For worthy borrowers seeking to take advantage of today’s low interest rates and relatively low home prices, having to jump through hoops that home buyers just a few years ago didn’t have to can seem very unfair.
On the other hand, home affordability numbers are better than they have been in decades. So yes it’s a great time to buy; and, these tighter restrictions should go a long way in reducing the number of foreclosures in the years ahead.
May the market be with you.
