Stories From The Street – October 2014

I’ve Heard Horror Stories about getting a Mortgage in Today’s Environment, What’s the Deal?

This is a great topic, and I could spend a week discussing this topic, as finance is near and dear to my heart. There is a lot of misperception about loans, rates, loan programs, and what it takes to get approved for a loan in today’s financial environment. There are 3 main questions that lenders stress to me when helping buyers find a home and get approved for a mortgage. I’m going to address each of those points individually, and hopefully by the end of this article you’ll have a clear understanding about mortgages in today’s stricter environment. When you hear someone talking about mortgages, you can chime in with some accurate data.

Many think that mortgages are next to impossible to get today, and I need 20% down before I can even think of buying a home?

There are 2 common misperceptions of people buying homes today. Yes, mortgages are tougher to get today than they were 5, 6, 7 years ago. But they are still attainable for those who are financially responsible enough to own a home. You see, from about 2000 to 2006 ANYONE could get a mortgage. The lenders – with loose government regulations, and even government encouragement- were literally using the ‘fog’ test. Put a piece of glass in front of the applicant, and if the glass fogged up, they were approved.

You think I’m kidding? There were loan programs called ‘Stated Income’. You could go to a lender and ‘State’ that you made X amount of money. They wouldn’t verify this. They would just take your word, and, as long as your credit scores were ok, you were APPROVED. Sound ridiculous? Yes, it was. In my estimation, from talking with a number of lenders over the years they have estimated that only about 70% of the people they issued loans to in the years 2000 – 2006, should have actually been approved. This means that 30%, 3 OUT OF 10, of the loans that they issued were doomed for failure from the beginning!

This is the reason that we saw the housing bubble pop and so many short sales and foreclosures flood the market between the years 2007-2011. Those 30% of unqualified home owners just walked away from their home.

This led to reform of the lending industry and closed the loopholes and the ‘fog test’ approvals. Thus, the banks and lenders became stringent and made the approval process for a loan tougher, but, in reality, they are now doing their jobs and not lending haphazardly to unqualified borrowers.

There is criteria that you have to meet with today’s guidelines. You have to have a certain credit score. You must have verified income. Your tax returns, in addition to the ones you give the lender, will also be pulled from the IRS to make sure they match. You must have some ‘reserves’ in your bank accounts. Seem reasonable to you? Does to me! Owning a home is a privilege and a HUGE financial undertaking that only the fiscally responsible should be allowed to have.

Now about that 20% down payment…

This is a common misperception from people, and this is partly driven by the media about this golden 20% rule.

It is simply not true. Banks and lenders have loan programs that allow you to purchase a home for less than 20% down, in some instances much less than 20%. Each lender and each bank has different programs available for purchasers, so I’m not going to talk about every program. I’m just going to tell you about a few that almost all of them have.

If you are doing a ‘conventional’ loan, there are programs that allow you to purchase with 5%, 10%, 15%, and 20% down payment. (Note that rate and terms vary and because I am NOT a lender, I will not get into those specifics. If you want more information I would be happy to get you in touch with a lender). The point is that you don’t have to have a 20% down payment to get a conventional loan.

The more common ‘low down payment’ loan is an FHA loan. Basically, what this means is that it is a government loan. FHA stands for Federal Housing Authority, and these loans are issued to the public but have the backing of the Federal Government. I’ve heard people refer to FHA loans as ‘First Time Homebuyer Loans’ and that is not true. You DO NOT have to be a first time buyer to be eligible for the FHA loans. The typical down payment on an FHA loan is 3.5%.

The other type of loan in our area is a USDA loan. This is also a government backed loan from the United States Department of Agriculture that is 100% loan program. The caveat here is that the house- location has to be eligible for USDA. If you have a property in mind, I can check with USDA to see the eligibility of the property.

As you can see there are options available besides the straight 20% down payment conventional loan product. A lender would be able to explain the qualification process and which loan best fits your family’s needs.

Get your Financial Information in line NOW

Each lender has their own set of guidelines and criteria for being able to approve you for a loan and thus a purchase. Some require additional documentation during the process, and underwriters are always verifying your employment status and doing a ‘soft credit pull’ right before settlement to make sure your credit scores have not changed since formal application.

To get the ball rolling with a lender, I always tell my clients to get prepared the ‘Rule of 2s’. Lenders, to start the process and to get you pre-approved, will ask for 2 sets of: Bank Statements, W-2s and Tax Returns, Pay-Stubs, Retirement Statements. If you can bring these 4 documents to the initial meeting with a lender you will be ahead of the game, and he/she should have a very strong inclination of what amount you should be able to be approved for a loan and also the best product (ie: Conventional, FHA, USDA) for you.

If considering purchasing or refinancing in the near future, start getting this information together NOW. It will save you time and headaches later!

Should I find a house first, or apply for a Loan?

Another excellent question that I get from clients and one that I can explain as a story with a recent client. I always tell my clients/buyers to go ahead and meet with a lender and apply for a mortgage NOW! Sooner rather than later! There are so many variables with today’s mortgages and the loans lenders can offer to you, it is advisable to eliminate these variables prior to checking out homes. What could happen is you’ll find the home you love and then find out that you can’t get a mortgage on that home, and you’ll be emotionally devastated.
I recently had a client that was selling a home and buying a new home. If they would have made loan application earlier, we could have avoided some last minute stress.

One of the reforms that came out of the housing bubble crisis is that lenders have varying interest rates that banks allow them to offer to borrowers of varying credit. Thus, if you have a 680 credit score your rate might be 5/8ths higher than someone with a 720 credit score. This change in rate could be a few hundred dollars a month in mortgage expense. What lenders offer now is a credit analysis. So let’s say you go to apply for a loan and your score is 688, if you make loan application early enough in the process, the lender can run a credit analysis for you and provide a very specific strategy about how to increase your credit score.

My client waited until I had the home they were selling under contract before applying for a loan. When the credit was run her score was 694, and she would save about 3/8ths a point if her score was 700. This savings was $100 a month, which is significant. The lender, Mike Haggerty, ran a credit analysis and found if she paid down a credit card from something ridiculous like $121 to EXACTLY $57, her score could increase 6 points. A week before settlement on their purchase Mike re-ran credit and her score was exactly 700, so my clients were able to get the improved rate and save $100 every month!!!! Now, if they would have applied earlier in the process, it would have saved some restless nights and stress over getting the improved rate.

This is a perfect example of why I advise my client’s right after we meet that the next step is to meet with a lender and to apply for a mortgage. In my 12 years I’ve always found that the more variables we can eliminate, the better we are in the long run. This will make for a smoother transaction.

I’m hoping you learned something this issue… Be proactive… Be prepared… and always, if you have a question feel free to ask me.