Tips to getting a mortgage in our current market
The time finally may be right to buy. All those would-be buyers who’ve been sidelined because they’re unable to secure a mortgage may find there’s now a path to homeownership.
“As we have wound our way from the financial crisis, hurdles and obstacles to accessing credit are starting to diminish,” says Keith Gumbinger of mortgage site HSH.
However, lending regulators are still hyper-aware of the widespread pain inflicted by the foreclosure crisis, and don’t want to see any borrower without a strong financial and credit profile win mortgage approval. At the same time, consumer advocates, lenders and government regulators have debated how strict mortgage rules should be while still ensuring that qualified buyers have the opportunity to buy.
In early 2015, home prices are down about 7 percent from where they stood at the bubble level in 2005, and with relatively low mortgage rates, affordability is still favorable, says Andres Carbacho-Burgos, senior economist at Moody’s Analytics.
Here, experts shed light on today’s mortgage rules, and why now the path to ownership is clear for more buyers.
Start with the Down Payment
Most experts agree that saving for a down payment is the biggest struggles for consumers hoping to buy.
“Most of the efforts by [the government entities that back mortgages] have been targeted at buyers with low accumulated assets for a down payment and who have at least moderately good credit,” noted Erin Lantz, vice president of mortgages at Zillow.
One government loan, the Federal Housing Administration mortgage, allows just a 3.5 percent down payment, and has been especially popular in the past few years. because it was often the only option that borrowers with limited down payments could qualify for then.
In late 2014 Fannie Mae and Freddie Mac, two other government agencies that back mortgages, announced new loan programs with just a 3-percent down payment. Each of these programs offer special rules, like requiring at least one borrower be a first-time borrower. Applicants to either program must have a minimum credit score of 620, provide thorough documentation of employment, income and assets, and purchase private mortgage insurance.
Keep Credit In Mind
The FICO credit scoring model, which takes data on whether consumers pay their credit card, medical, phone and other bills from the three major credit bureaus, and then assigns a number from 300 to 850, is used by most mortgage lenders.
The higher the number, the better the score. In the immediate wake of the financial crisis scores well into in the 700s were required for borrowers making less than a 20 percent down payment, says Don Frommeyer, past president of the National Association of Mortgage Brokers, but there has been easing since then. (See the 620 requirements on the new 3-percent Fannie and Freddie loans.)
The Dodd-Frank Wall Street Reform and Consumer Protection Act mandates that lenders look at how affordable a mortgage will be to a borrower, taking into consideration all the other recurring debts, like his credit card and auto loan payments. Those monthly recurring obligations, combined with the monthly amount that a borrower would pay on the new mortgage — including a monthly allotment for property taxes and homeowner’s insurance — shouldn’t take up more than 43 percent of the borrower’s gross (pre-tax) monthly income.
Usually, homebuyers make an initial visit to a lender to get “pre-qualified,” where the lender looks at the financial profile of the potential borrower, including the tally of recurring debt to income and estimate how big a mortgage the borrower should be eligible to obtain.
But when a buyer selects a home and makes a formal application, the debt-to-income ratio is again measured, and lenders also will check to see that no new debt, such as an auto loan, has been added when the borrower is ready to close on the loan, notes Frommeyer.
Indeed, lending rules are still strict enough that borrowers must be careful to keep up prudent financial practices every step of the way.