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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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