Has it become easier to get a mortgage in the last three years? Not from what I am seeing. Whether it is a conventional, FHA, or VA mortgage, in most instances, it is harder to obtain a mortgage than it was just three years ago. The good old bad days are gone forever, and the mortgages must meet higher standards with increased documentation for verification. A mortgage must fit precisely into the box with very little wiggle room. Policy and procedure always reflects the worst abuses in the past and we are seeing that now. It is vital to understand how the process works. Underwriters are in essence referees who make sure that a mortgage conforms to a set of guidelines so that the investor will purchase the loan. The investor package loans into bundles that meet these specifications. This enables them to sell the mortgages, in bulk, to institutions and individuals who purchase mortgage backed securities. Those who purchase mortgage backed securities naturally want to know they are investing in a product where they can have a reasonable expectation of repayment.
While some of the standards such as down payment, debt to income, have been fairly constant, other components of the mortgage process have become more stringent. Examples of higher criteria would be credit score, type of property, and stability of income. An example of higher credit score requirements would be that while HUD may say a credit score of 580 is acceptable, most of the investors who buy mortgages want a minimum of 640 or they will not purchase the loan. When it comes to the property we see increased scrutiny on the condition, especially if unpermitted work is involved. If it is a condo it really starts to get fun. The status of the Home Owners Association (HOA) will be more closely examined than ever before. While the owner occupancy ratio for a condo project (defined as the number of owner occupants in a project versus the number of rental properties) has been a factor for a number of years, current standards for some types of mortgages call for a higher percentage of owner occupants. Another recent example of raising the bar is the number of owners within a project who are delinquent on their HOA dues. Stability of income, particularly for self employed borrowers, is another challenge. If a borrower’s income has declined from 2009 to 2010, a reasonable question is will it keep declining? The response that the economy is down is typical, but it does not address the question.
What about the void created by borrowers who do not fit into the box for a conventional, FHA, or VA mortgage? A possible answer is portfolio loan products or “hard money” (also known as private money) loans. More on this next time.
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