Banking on the 'Mortgage Stool'

RISMEDIA, February 23, 2009-(MCT)-You don’t have to be a rocket scientist to figure out how to get your mortgage application approved these days, but it wouldn’t hurt.

That’s because lending has sobered up since those halcyon days of the housing boom. Chastened by the nation’s economic troubles apparently ignited by loosey-goosey lending standers, lenders these days ask a lot more questions of anyone seeking to buy a house.

“I had one guy say, ‘What’ll they want next-to know what color socks I’m wearing?'” said Donna Angarone, a mortgage rep with Countrywide Home Loans in Glenview, Ill.

“I felt really sorry,” she said of her recent loan applicant. “I had to keep calling him and asking him for ‘just one more thing’ (to fill out his financial picture). And then they’d ask for something else.”

But the good news, she said, was that the client dug into his file cabinet and eventually got his loan. And mortgage-industry representatives say that despite the sometimes-Byzantine path through the current lending environment, mortgages are out there to be had.

“The first thing is, don’t listen to the media making it sound like there’s no money out there-there is money out there,” said Paula Kurka, senior mortgage partner at Professional Mortgage Partners, a mortgage banker in Downers Grove, Ill.

Kurka and others say, however, that would-be borrowers today will need better credit histories and bigger down payments than just a few years ago-not to mention to be ready to run a paperwork obstacle course.

“I know it’s heresy, but you’re going to have to prove you are the borrower you say you are,” said Keith Gumbinger, vice president of HSH Associates, a mortgage-industry publisher in Pompton Plains, N.J.

But, he and other mortgage experts say, forewarned is forearmed. Knowing what to expect before you apply-even before you go house-shopping-can save time and money.

Gumbinger says current market standards can be thought of as a “four-legged stool” for borrowers to stand upon. “The further outside you fall from these four tenets, the more closed the markets become,” he said.

They are:

1. Be a better borrower. You’re likely to need at least 720 (on the 850-point FICO credit rating scale) to get access to today’s best rates, he said. In yesteryear’s marketplace, 620 was considered to be that threshold.

That doesn’t mean you can’t get a mortgage with a lower score-you’ll just pay a higher rate for it.

2. Down payments are critical. Expect to put at least 10% down for so-called “conforming loans”-mainstream mortgages that Fannie Mae and Freddie Mac will purchase, Gumbinger said. This is a marked departure from widespread practices in the old days, which saw many loans with 0% to 5% down.

Lenders probably will require the borrower to pay for private mortgage insurance if they put down less than 20%. The amount of the insurance is based on the ratio of the loan to the value of the property and a handful of other factors, said Dan Green, a loan representative for Mobium Mortgage Group in Chicago.
Federal agencies offer low-down-payment alternatives that are soaring in popularity these days.

In these arrangements, the government doesn’t lend the money, but it insures loans through the Federal Housing Administration or the Veterans Administration. For both, borrowers need to apply for loans through lenders who have met federal standards.

VA loans-for armed-forces veterans-allow qualified borrowers to finance 100% of the loan and don’t charge for mortgage insurance. The FHA now requires a 3.5% down payment and charges a monthly premium for mortgage insurance, according to the National Association of Realtors. (Detailed information for both types of loans can be found at homeloans.va.gov and at www.hud.gov/buying/loans.cfm.)

3. Be a paper tiger. “Breathing on your application was once good enough” to qualify for a mortgage, said Gumbinger. But now, save your breath and patiently dig up every piece of paper-potentially more of them than you might have imagined-that can document your income and savings.

This will include W-2 forms and tax returns, but might also mean producing letters that explain specific financial circumstances. Lenders want to be reassured that you really can afford a home.

4. Lighten your debt load. Not long ago 55% was a mainline figure-that is, if your income was $1,000 a month, mortgage lenders might have allowed you to commit $550 to your mortgage and other debts, such as car loans and credit-card balances, Gumbinger said.

“That’s been ratcheted back,” he said. “Now we don’t see much in excess of 43%.”

A couple of “furthermores” to keep in mind:

So-called “jumbo” loans (that exceed the $417,000 conforming-loan limit for loans Fannie Mae and Freddie will purchase) always have carried higher fees than their conforming cousins, but since the credit crunch began in 2007, that cost gap has widened. They may be 1% to 2% pricier than conforming loans, said Ken Perlmutter, president of Perl Mortgage in Chicago.

Jittery lenders have pulled back on stated-income loans for borrowers who documented little of their income and assets.

This has created a quandary for the borrowers the loans were created to serve _ business owners or investors who would face an onerous amount of paperwork in documenting their income and assets.

But many small-business owners’ tax returns tend to be laden with expense deductions that make the taxpayers look poorer on paper than they really are. It’s a Catch-22 for them: Self-employed people looking to save money from a tax standpoint may be cut off from mortgages that are based on their tax returns.

However, Gumbinger said self-employed people may still qualify.

“That’s not to say you’re going to face as easy a time as someone with W-2 forms, etc.,” he said. “You might have a longer response and the cost of money might be slightly higher, but it’s still attainable.”

Lenders have always urged buyers to seek loan pre-approval before beginning a house-hunt, but they say the new intricacies of mortgage approval make that even more important.

“Anybody who’s contemplating buying a house, first and foremost, needs to find out what the requirements will be,” Kurka said.

Daunted by all this? Lenders say that even with the current rigors, keep one enticement in mind: Interest rates are at historically low levels.

Recently, conforming 30-year fixed-rate loans have averaged 5.4%, Gumbinger said. That’s up from a recent low of about 5%, but still an improvement over what was seen in 2008.