The mortgage industry has changed the way it does business, and for many Americans, who have hopes of purchasing a new home or refinancing their current loan, there are many hurdles along the way. All lenders assess risk, and while there may be many points of interest in a particular loan scenario, there will always be some analysis of Income, Credit Report, and Loan-to-Value. Prior to our current mortgage meltdown, lenders were eager to lend their money, and they lowered their qualification for approval, in all of these areas. The new guidelines allowed a lot of people to become first time home buyers, they allowed people to move to larger homes, they allowed people to become real estate investors, and they allowed people to take their equity in cash. The lenders had an elaborate menu of loan products, one to fit every buyer, and when that wasn’t enough, they introduced interest only loans for people to buy bigger houses than they might otherwise. All of us have paid the price of a system out of control, and the lending institutions have made adjustments in their procedures to ensure the stability of their industry. Unfortunately for the consumer, this pendulum swing has gone too far the other way.
In the days Before Mortgage Meltdown (BMM), the local business person, and all self employed with good credit scores were able to obtain loans by just stating their income. Now this area of risk is viewed with much more scrutiny. Tax returns are a must for all self employed, and if you take a lot of write offs, then be ready to support your claim of greater income to your underwriter. Many of the loans in foreclosure today are the result of stated income loans. Many people with these loans are not able to refinance to a lower rate because the loan product that allowed them to get the home is no longer available. Today, it is customary for the lender to request a copy of your tax transcripts on all loans.
During the housing boom, the credit score requirements steadily dropped. The lenders were running out of ‘A’ clients, and the sub-prime market was born. People with credit scores below 600, and that is NOT a good score, were getting mortgages with little or no money down. The interest rates were higher, and the loans were adjustable, but these homeowners were certain that they would be able to refinance in a few years. Well, it’s been a few years and a 620 credit score barely gets you in the game today. And if your score is below 720, you may pay the price when it comes to interest rate. Your credit report will also reveal your outstanding debts. Today, you should be prepared for the lender to count any and all debt found on the credit report against you, with few exceptions.
On May 1st, the process for ordering an appraisal has now become the responsibility of the lender. The appraisal has to be paid for upfront, and the home value will be determined without any further discussion. The days of the comp-check are no more. If you wish to refinance, it is now very important that you have a realistic idea of the value of your home. The value is more important than ever. There is no more 100% financing, in fact there are only a few options for loan amounts that are more than 90% of the home’s value. As the lenders assess risk, it’s easy to see why they would limit their loan-to-values while home values are on a decline.
The news is not all bad. Our government has an answer, and for the time being FHA is doing the trick. Many people are taking advantage of this program, obviously because it makes sense for them, but it’s also one of the only games in town. There are a couple of other Hope for Homeowner type programs recently released, but the industry is still trying to figure out how, and who they ultimately benefit. In today’s uncertain economy, any chance to lower your rate and monthly payments should be investigated, and I encourage anyone who has been thinking about refinancing or purchasing, to work with a person that can help them navigate the mortgage waters of today. The rates won’t stay this low forever. A reputable company will work the numbers for you to see if your scenario will work.
About the Author: Noah Torch is a Loan Office with Checkpoint Mortgage in Kennesaw. He also is President of the West Cobb Business Association. He may be reached at noahtorch @ checkpointmortgage.com or 770-516-5522, Extension 115.