Homebuyers and those refinancing are entering a new realm in the loan process.
Property Profiles
The Mortgage Maze
You’ll need this map to navigate your way through the newest changes in the mortgage industry.
BY
Miun Gleeson
PHOTOGRAPHY
iStockphoto/Baris Simsek

Decreasing home values and defaults on loans have made mortgage lenders more cautious this past year. Loans are stricter, more specific and can be more difficult to get. But that doesn’t mean you, whether a future or current homeowner, should be discouraged. It’s all a matter of knowing the new rules of the game.

The new standards for potential homebuyers reflect the changing face of the lending industry. Jacque Taylor, senior loan operations manager for Capitol Federal Savings Bank, says borrowers should expect to do the following:

  • Save at least a 3.5-percent down payment for FHA loans or 5 percent for conventional financing — and be able to verify it came from your own funds.
  • Establish a good, traditional credit history (up to four lines of good credit history with at least 12-24 months of payment history).
  • Be able to document a consistent history of income and show that it is likely to continue.
  • Be able to document stable employment history.
  • Demonstrate that you can afford a payment; with so much press about affordability, qualifying ratios have been reduced to ensure affordability, but the industry forgot about the importance of a “housing ratio” and has now added this back in. Capitol Federal Savings currently requires 33-percent housing ratio and 41-percent total debt ratio maximums.
  • Have appraisals scrutinized for supported values. Make sure the report is consistent. Do the comparables support the market value? Are they current enough? With declining values, this has become a very important piece of the pie in the underwriting process.

Refinancing
Another option many current homeowners are turning to is refinancing. With rates at historic lows at press time, it’s an attractive option for borrowers who want to lower their monthly payment. But obtaining one is not as easy as one might think. “Though it sounds like the perfect thing to do for everyone, it actually only works for a small percentage of homeowners,” says Cindy Hayward, real estate agent with Reece and Nichols. According to Cindy, among the problems homeowners may encounter in the refinancing process are:

  • Loan program availability. Many of the programs that were available two and three years ago are simply no longer available.
  • The homeowner must requalify for the home.
  • FICO score guidelines have changed.
  • No more 100-percent financing.
  • Some homeowners have experienced a loss in their property value.

Jacque says another change in refinances is the definition of “cash out,” which now means paying off anything other than the first mortgage and rolling in some standard closing costs. Private mortgage insurance (PMI) companies will no longer insure a cash-out refinance, so unless you can come in at 80 percent loan-to-value (LTV) or less, you have limited options. Subordinating is also getting more challenging as well since many banks did not insure their second mortgages that were used for “combo loans” and subordinate banks are denying requests. Many have increased their subordination fees and/or the approval process is very long and exceeds the borrower’s rate lock period on the first mortgage application.

Jumbo Market
Demand for jumbo loans continues. (For Freddie Mac, that equals loans higher than $417,000; Capitol Federal’s jumbo is higher than $500,000 and its super jumbo is more than $900,000). With this type of loan, banks typically charge a higher rate to offset risk, appraisals can be difficult because of a lack of comparable sales and declining values, and buyers must have a minimum credit score of 700 for insured loans.

Second Homes
Second-home loans are available and usually around the same rate as a primary home. Though the lender will require only a 5-percent down payment, many of these properties are located in areas considered to have a surplus of inventory (Florida, Ozarks, Arizona). This condition will require an additional 5-percent down payment. “Banks will typically be looking for larger down payments, minimum credit scores in the 700s and a good, solid history of reserves,” Jacque says.

Home Improvement Loans
With less-than-ideal market conditions, many homeowners are opting to stay put  and invest money in their homes. “Home improvement loans and home equity lines of credit are certainly at attractive rates,” Cindy says. “But the homeowner needs to have significant equity in the home to be able to take advantage of the rates. One thing that was difficult in the past year for homeowners was that many lenders re-evaluated existing home equity lines of credit (HELOCs) and reduced unused lines.” 

With cash-out refinances limited to 80 percent LTV, there may be an increase in applications for consumer home equity lines or closed-end second mortgages to be used for home improvement purposes (which could be a problem for people who have already taken out second mortgages when they bought the home with a “combo loan” product).

Combined LTV ratios have typically been reduced from 100 percent or higher down to 95 percent maximum. Many banks are requiring full appraisals now as opposed to county valuations to ensure a current valuation, especially if the borrower is looking for maximum financing of 95 percent.

So whether you’re buying your first home or looking to invest in what you already have, it’s all about managing expectations and knowing what to anticipate in today’s decidedly different lending market.