Changes in the real estate and mortgage markets have prompted many,
including many in the media, to wonder, "Can you get a loan today?" For an
answer to this important question, YOU Magazine turned to Barry Habib, an
expert in the mortgage-backed securities market. Chairman of Mortgage Success
Source and founder of Mortgage Market Guide, Mr. Habib has managed a hedge
fund, authored a stock advisory newsletter, owned an insurance agency, and has
been an avid real estate investor for many years.
Habib says that, yes, you can get a mortgage in today's market, but you
have to understand that lenders have returned to a pre-2000 mindset – a kind
of "common-sense lending" that seeks long-term success versus short-term
profits. There's plenty of money available, says Habib, but your mortgage must
make sense in today's terms, not the looser standards permitted by lenders in
2000 and 2001.
How Did We Get Here?
In 2000 and 2001, real estate was hot – make that white hot. According to the
S&P/Case-Shiller Home Price Composite 10 Index, an index that follows home
prices, values increased 21.5% from the years 1990-1999. During the first two
years of this decade alone, home prices increased 23.6% for the same index.
This resulted in a period of wildly loose lending guidelines that would
ultimately fuel the subprime mortgage collapse in 2008.
In retrospect, it's easy to see, and even understand, the mistakes that
were made during this unusual period of growth. Rapidly escalating home prices
not only eased economic and personal financial woes, they invited opportunity
and risk whose rewards, while hard to resist, couldn't possibly be sustained
at such a high level. Nonetheless, increasing equity created flexibility that
benefitted buyers and sellers alike – as long as property values continued to
ascend.
During this time, borrowers with no jobs, no down payments, and poor credit
histories could easily obtain financing. A host of exotic mortgage products
flooded the market. And even if a borrower got into trouble, there was a
multitude of options to help him or her climb out of the hole, including
refinancing or even selling the property. A lot of people made a lot of money
during this time.
But, as the real estate market began to turn and the economy began to
suffer, home values slowed and then ground to a halt, and the true risk in the
market was exposed. No longer supported by skyrocketing home values, borrowers
had fewer options, lending guidelines tightened, adjustable rates adjusted,
resulting in a crash in the market that is only now just beginning to turn.
What Does This Mean to Borrowers Today?
Simply put, home lending has returned to what insiders call a "full-doc
world." This means lenders need proof, documented evidence that a borrower is
creditworthy and likely to repay the loan. This creditworthiness is based on
the four tenets of lending: the borrower's ability to pay, willingness to pay,
equity in the transaction, and the property itself.
Ability to Pay
This is the documentation portion of the equation. In determining one's
ability to repay a loan, it is now common for a lender to ask for recent
paystubs, W-2s, and possibly tax returns in the case of a salaried employee.
For self-employed borrowers and those earning commissions, tax returns for the
two most recent years and a profit and loss statement for the current calendar
year will likely be required. While certain exceptions may be granted,
potential borrowers can further increase their chances of securing a mortgage
by keeping their debt-to-income level below 45%.
Willingness to Pay
Repercussions of the credit crisis have made FICO scores more important than
ever to lenders. In order to obtain the best interest rate and have a broader
selection of loan programs from which to choose, potential borrowers should
strive to keep their FICO score above 720.
Borrowers whose scores fall below 720 where the loan will be sold to Fannie
Mae and Freddie Mac can expect risk-based pricing, which could result in
either higher costs or higher rates. So, while it is possible to get a loan
with scores as low as 620, programs other than Fannie Mae or Freddie Mac are
probably the best path for a borrower with a lower score to take.
Equity in the Transaction
With the exception of mortgage programs guaranteed by the USDA and VA,
no-down-payment loans have pretty much evaporated on a national level. Today
it is expected that borrowers put a minimum of 3.5% down for an FHA loan and
5%-10% down for agency loans sold to Fannie Mae or Freddie Mac.
If someone is strapped for cash, however, it is still possible in the
purchase contract to negotiate with the seller to pay a percentage of the
closing costs, as long as it's within the program's limitations and the
property appraises highly enough for this action to be permitted.
With the exception of the President's Home Stability Plan, it is no longer
possible to refinance a loan without equity in the property. However, under
this plan, millions of homeowners are expected to be able to take advantage of
being able to refinance at a loan-to-value of up to 105% of the appraised
value.
Cash-out refinancing has also been tightened, compared to just a few years
ago. While pulling equity out of a home is still possible, the costs to do so
have become more expensive for homes with a higher loan-to-value. Depending on
the program, cash-out transactions have generally been limited to a maximum of
85% of the home's appraised value.
The Property
Home appraisals are also being more scrutinized today to ensure the value of
the home is both fair and realistic for lender and borrower alike. On May 1st,
new legislation (Home Value Code of Conduct or HVCC) placed a barrier between
loan originators and appraisers for loans sold to Fannie Mae and Freddie Mac
(legislation does not affect mortgages guaranteed by the FHA, USDA or VA.)
For those loans impacted by HVCC, all parties involved should be prepared
for potential delays. If value conflicts occur, sellers, buyers, homeowners,
and real estate agents must be prepared to provide information where needed.
In locations of the country where property values have been in significant
decline, additional documentation may be required by the appraiser to help the
lender justify the appraised value.
In Summary
Yes, getting a mortgage may be more difficult than it was a few years ago, but
don't assume that you can't get one.
Reports suggest that over $2.7 trillion in loans will be originated in 2009
– that's over $1 trillion more than 2008. Contact the professional who
supplied you with your copy of YOU Magazine. With interest rates at or near
all time lows, lower home prices, and the $8,000 tax credit for first-time
buyers, it's worth the time and effort to find out if you can benefit from
common-sense lending in today's real estate market.
