In a recent study of RE/MAX agents in northern Illinois, agents reported that although this remains a great time to buy a home due to ample inventory and mortgage interest rates at a historic low, earning approval for mortgage financing has become a longer and more difficult task.
Mortgage interest rates in late November hovered near historic lows, with Freddie Mac reporting that the interest rate for a 30-year fixed-rate mortgage stood at 4 percent while the rate for 15-year fixed-rate mortgages hit 3.31 percent. At the same time, homeowners are willing to negotiate on everything from final sales prices to closing dates and repairs. This means that buyers can expect to pay less for single-family homes and condominiums today, even those in prime locations throughout northern Illinois.
But there’s one challenge that buyers face today: Earning approval for mortgage financing.
“It used to be that if you could breathe and had a pulse you could buy a home,” says Sharon Esslinger, managing broker/owner of RE/MAX Country Crossroads in Viola. “That is no longer the case. Things are tighter, more rigid, today. Getting a loan today requires more patience.”
According to RE/MAX, the good news is that the most negative rumors aren’t true: Mortgage lenders are, in fact, continuing to lend money to qualified buyers. And those buyers worried about credit and down payment requirements also have a solid option in FHA financing, which has steadily become a more popular option among borrowers. But it is true that qualifying for a mortgage loan is more of a challenge today than it was during the height of the housing boom.
RE/MAX agents in Illinois say that buyers today must be prepared for this new lending reality. Buyers with good credit, solid debt-to-income ratios and the documents to support their income claims will still be able to find favorable mortgage loans, and they’ll find them at historically low interest rates. Buyers just have to be patient and expect to provide a lot of paperwork before closing their loans.
“This really isn’t new. Getting a loan was never a slam dunk back in the pre-boom days,” says Mark Zipperer, broker/owner of RE/MAX Edge in Chicago. “You used to be nervous about taking out a loan. You did whatever you needed to do because you were asking for someone else’s money. You made sure your finances were in order, you paid down your credit-card debt, you socked away some money and were ready to go. During the boom, all that planning went away. During the boom we joked that we could write a mortgage application for your pet and the lenders would close on it.”
Today, buyers hoping to qualify for mortgage financing at low interest rates must first have a solid credit score. Most conventional lenders today reserve their best rates for borrowers with credit scores of 740 or higher on the popular FICO credit-scoring scale.
Buyers must also have low credit-card debt and income levels that are not only high enough to cover their monthly mortgage costs comfortably, but that can also be documented with a paper trail. Most conventional lenders today want buyers’ monthly debt—including their estimated mortgage payments—to be no more than 36 percent of their monthly income.
Susan Coveny, broker/owner of RE/MAX Prestige in the Chicago suburb of Long Grove, said that she tells her buyers today that they must be able to document all of their recent significant financial transactions. For example, buyers who received a $2,000 payment into their checking accounts must be able to produce documentation showing that this payment is either an annual bonus check or a gift from their parents.
“Today, we have to prepare our clients to have all of their financial paperwork in order,” Coveny says. “Clients need to make sure that everything is in perfect order. Lenders today want to make sure that buyers are living within their means. They want to make sure that they won’t overextend themselves by taking on a monthly mortgage payment.”
It’s also important for buyers to have financial reserves, Coveny says.
“Lenders want to make sure that if buyers lose their jobs, they’ll be able to make their mortgage payments for several months as they search for new employment,” she says.
Vicki Geiger, broker/owner of RE/MAX Top Properties in Morris, relies on the many relationships she has formed with mortgage loan officers during her long real estate career to help her clients navigate the new mortgage reality. When her clients have questions about the mortgage-lending process, Geiger recommends one of the loan officers with whom she’s formed a relationship.
This way, Geiger knows that her buyers will receive the best advice possible when it comes to what documentation, credit scores and debt-to-income ratios they’ll need to qualify for a mortgage loan.
“Resourcing is one of the most important benefits that real estate agents can provide to their clients,” Geiger says. “I know many excellent lenders. If my clients ask me legal questions; I’d refer them to a real estate attorney. If they have lending questions, I refer them to a knowledgeable loan officer.”
Above all, RE/MAX professionals advise buyers today to be patient during the lending process. Mortgage loans do not close in two weeks. The underwriting process takes time.
Buyers should not be insulted when their lenders ask them for additional verification. Just ask Lynn Fairfield, broker associate with RE/MAX Suburban in Libertyville.
She recently worked with buyers who had gotten married in the middle of applying for a mortgage loan. These buyers received a significant amount of money for their wedding, and promptly deposited it into their bank account.
Their lender wanted proof that the money came from the wedding. He asked for a copy of the couple’s wedding invitation.
“I’d never heard about anything like that before,” Fairfield says. “But that’s the way it is today. Borrowers need to be ready to verify everything.”