Understanding New Challenges for Home Financing
If you have been considering buying a home in the near future, you have
probably heard how restrictive the mortgage market has become. Estimates
indicate that only about 30% of all mortgage applications are currently
being approved; a significant drop from the 90% that was the standard
just a few years ago.
In response to the housing crisis, lenders have been forced to tighten
their underwriting standards, resulting in buyers needing higher credit
scores, higher down payments and larger incomes to qualify for a
mortgage. As if that was not bad enough, there are now even more
challenges that buyers must face in order to purchase a home in today's
market.
If you want to obtain a mortgage loan today, you must have better than
average credit in order to get the best interest rates and oftentimes in
order to become approved at all
(Read
the important of your credit score here). It is still possible in many areas to
obtain a mortgage with a credit score of 620 but you'll likely have to
pay a higher interest rate.
You must also be prepared to deal with increased scrutiny regarding your
assets and income. In the heyday of the housing market, banks were not
particularly concerned with verifying income but that is no longer the
case. It is not uncommon today for mortgage lenders to not only verify
income but to verify it more than once.
More importantly, borrower requirements are continually changing. Many
buyers find that just when they think they understand the requirements
to obtain a mortgage, those requirements change. Not only must you have
a credit score above 700 in many cases to purchase a home but
increasingly you must also have a 20% down payment (if you want to avoid
PMI), an employment history that is stable and a total debt ratio that
does not exceed 36%. Even then, lending guidelines are subject to
change.
Home buyers are also increasingly running into problems associated with
home appraisals. Many homes are not appraising for the contract price as
a result of the large number of foreclosures, which has led to an
increased number of short sales, bank-owned sales and sheriff sales; all
of which have resulted in driving down the market value for homes in
many areas. In many regions, real estate professionals are finding that
the implementation of the HVCC (the Home Valuation Code of Conduct) has
significantly impacted sales. The HVCC was meant to regulate the
appraisal industry and put a stop to fraud but in many instances the
unintended impact has been a hindrance on the market as a whole. Some
real estate professionals have found that as a result of the HVCC
appraisals are now being completed by appraisers who simply either do
not have a sufficient amount of experience or who are completely
unfamiliar with the market in which they are working. This has caused
loan applications to be rejected and inaccurate appraisals.
Low or no documentation loans are also a thing of the past. A few years
ago these loans were popular with individuals who were self-employed and
who did not receive a typical paycheck, making it easier for them to
qualify for a home loan. Due to increased restrictions, it is now much
more difficult to qualify for this type of loan, if not impossible in
many areas.
If you are considering the purchase of a condo, you may also face
additional challenges. Today it's actually much more difficult to
receive financing and approval to purchase a condo than it was just a
few years ago. Along with needing to approve the buyer, lenders must
also approve the condo building, including various elements such as
owner occupancy rates, cash reserves and low delinquency rates. Any one
of these factors can stall a condo purchase or cause it to be denied
outright. To make matters worse, the approval method for purchasing
condos was recently changed by FHA, making it even more difficult to
purchase a condo for buyers attempting to use a FHA loan.
For buyers who are trying to benefit from the low interest rates and low
home prices that are available today, it can still be a challenge to
become approved to purchase a home; especially as lending requirements
continually change. The best course of action for prospective buyers is
to begin working on reviewing their credit and obtaining their
documentation well in advance of when they plan to purchase a home. At
the very least, start planning six months in advance.
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