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The Mortgage Professor: Some Well-Off Borrowers at a Disadvantage

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By Jack Guttentag

(MCT)—In a recent column, I pointed out that mortgage lenders today can make a loan with only 3 percent down to a borrower with a steady job but a credit score of only 570, and have it insured by the Federal Housing Administration. But lenders can’t or won’t accommodate a self-employed physician who can’t adequately document enough income, even if the physician can put 30 percent down and has a credit score of 800. Considering that the likelihood of default is at least 10 times higher on the first mortgage, this is insane.

The insanity is best viewed in the broader context of how the current market differs from the one we had before the financial crisis. Some types of borrowers do better in the current market while others, such as the physician mentioned above, fare much worse.

How borrowers have fared depends heavily on their risk status.

—Borrowers seen as low-risk: The market is even more receptive to this group than it was before the crisis. Loans are as readily available to them today as they were before the crisis, but the rates are lower. These borrowers are better off now.

—Borrowers seen as moderate-risk: Loans are available in the current market, but the rate spread between moderate-risk and low-risk transactions is larger than it was before the crisis. Hence, these borrowers don’t enjoy the full benefit of the unusually low market rates.

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