Seeking approval
New rule for getting a mortgage today: Don't assume anything
By Amy Hoak • MarketWatch
July 18, 2008
CHICAGO (MarketWatch) -- In today's mortgage market, there's still money out there for those with good credit scores, significant down payments and decent income streams.
But even borrowers who think they're well positioned to be approved for a mortgage "can't assume anything," said Guy Cecala, of Inside Mortgage Finance. And they'd better be prepared to shop around to get the best rates.
Cecala estimates that a third of the people who were able to get a loan in 2005 and 2006 no longer qualify for financing today. That takes into account the disappearance of subprime and Alt-A loans as well as the tightened requirements for getting prime mortgages, he said.
"Mortgage credit is as tight as we've seen it in a generation," said Cecala, publisher of the industry newsletter. "When does it get looser? When people feel that the housing market is stabilized, and that's really not going to happen until we start seeing an end to rising defaults and foreclosures, and housing prices have stabilized in markets throughout the country."
If he had to guess, it'll be another year before getting a mortgage becomes any easier.
In some cases, lenders are even looking beyond the numbers for proof not only that an applicant has a job with a steady income stream but is also likely to keep that job, said Bob Moulton, president of Americana Mortgage Group on Long Island, N.Y.
Case in point: One of his clients, an employee at Bear Stearns, was recently required to get a statement from the human resources department indicating continued probability of employment at the firm. The statement could not be obtained, and the mortgage wasn't approved, he said.
"They're trying to be a lot smarter than they were three, four or five years ago," he said.
And when looking at a borrower's income, lenders have become more skeptical of counting on bonuses to come through this year, said Steve Habetz, president of Threshold Mortgage in Westport, Conn.
A barrier to buying?
Borrowers are definitely getting the message that the rules these days for getting a mortgage have changed.
According to a recent survey by Move Inc., 28% of would-be buyers perceive the lack of funds for a down payment as a barrier to owning a home these days. Coming up with the cash was the second highest hurdle people saw to buying, while 31% said that high home prices constituted the biggest roadblock to buying in this market. Move is the operator of Realtor.com.
That said, people are seeing opportunities to buy -- especially in some of the areas hardest hit by home-price declines -- as searches in these areas have been increasing substantially at Realtor.com, said Errol Samuelson, president of Realtor.com.
A buyer's challenge, then, often is: "How do I figure out the financing?" he said.
Seventy-eight percent of prospective home buyers said that they're willing to make sacrifices to save and earn extra income for down payments -- and would make some compromises on where they decide to live -- in order to buy a home in this market, according to the Move survey.
But some at the National Association of Realtors think getting mortgage might not be as hard as consumers believe -- and might even be getting easier. A June survey of more than 2,000 NAR members hinted that buyers aren't finding it impossible to obtain financing.
When asked why their most recent prospective buyer postponed a home-buying decision, 6% said it was because of mortgage difficulties. On the other hand, 23% said the prospective buyer didn't buy because of waiting for prices to drop further.
Mortgage rates, in general, have drifted up from their low levels at the beginning of the year, which could take away one advantage people might have seen to making a home purchase in today's market, Habetz pointed out. Freddie Mac reported that the 30-year fixed-rate mortgage averaged 6.26% this week; Habetz said fixed-rates need to be closer to 5% in order to jump start home buying. See full story.
What to know
If you're shopping for a mortgage these days, here's what you need to know:
- For the best rates on a conforming loan, people need a 20% down payment and a FICO of 750 or higher, Cecala said. Not surprisingly, very few people meet those requirements, he added. Risk-based pricing by Fannie Mae and Freddie Mac will cause those who don't meet those basic parameters to pay more for their mortgage. So even if you're able to get a mortgage with a 640 credit score, the loan terms will be more expensive, he said -- and if you have a low credit score you'll probably have to put more money down than someone who has better credit.
- Borrowers who aren't able to put 20% down will likely have to purchase mortgage insurance, and to get that there's another set of requirements that must be met. Insurers are being "very cautious" with regard to what they will insure, Habetz said. Requirements differ at each mortgage-insurance firm, but if a home is in a market where prices are declining, borrowers may be asked to put down 10%.
- Borrowers who are eligible for a loan backed by the Federal Housing Administration may be able to put down as little as 3%. That has become a more popular option for those with weak credit scores.
- Most nonconforming jumbo loans today are being made by portfolio lenders, who keep the loans on their books, Cecala said. Consumers may do well by doing some legwork and comparing rates at local community banks, which have been "coming out of the woodwork" to offer competitive rates, he added.
"There's money to be had, you just have to jump through hoops to get it," Cecala said.