You have watched the market “adjust” for the past five years and have decided that this is the year to make your move and buy your dream home. You have meticulously built and maintained your credit score, are aware of all the relevant debt-to-income ratios and you just called me to get the process going. The conversation goes something like this:
Buyer Bill (Not his real name. It’s William.): “Hi Steve. I’m finally ready to pull the trigger. Will you help me find my dream home?”
Me: “Bill, great to hear from you. (I’ve been sending Bill homes for sale for twenty-five years). I would be honored to assist you. Have you spoken to a lender, yet?”
Buyer Bill: “Stevo, Stevo, I have told you a hundred times that I’m qualified for the loan. Don’t worry about it.”
Me: “But Bill, if we find your dream home and make an offer, the seller will expect us to submit a loan pre-approval letter with the offer package.”
Buyer Bill: “Just tell them I’m qualified. I’m golden, man! I’ll get the old loan ball rolling when my offer is accepted. In the meantime, you can just use that preapproval letter I sent you back in 1997.”
Okay, this was not a real conversation, but it’s close to many I’ve had with buyers over the years. What’s changed lately is just about everything. I’m not a mortgage broker and will not pretend to be here. It’s difficult enough to do my job well, much less try to wear the hat of a lender. But here are a few general hints as to why a buyer needs to take the loan qualifying process seriously, even if they believe are well qualified.
FHA Loans – The Federal Housing Administration (FHA) insures loans made by banks. These loans are very popular right now since they are about the only loans you can get if you have less than 20% down. Like most lenders, they have taken a hit, too. In an attempt to rectify their past sins, the FHA has changed their lending (insurability) guidelines three times over the past year. These include new requirements for down payments, up-front mortgage insurance fees, monthly insurance premiums and the allowable seller credits. Like a moving target, if you’re not aware of the current regulations, it can result in some very unhappy surprises — like overall loan cost surprises or, worse, not even qualifying for the loan. There is no fun in getting emotionally invested in the home search process and finding your dream home, only to find out late in the process that you can’t get the loan you were sure you could qualify for.
Fannie and Freddie – Banks generally don’t hold the loans they issue. They sell them in order to make more loans. Who buys (or guarantees) them? Fannie and Freddie. These are the Government Sponsored Enterprises (GSEs) that buy certain home loans from the banks. If there were no GSEs, there would not be much of a credit market for real estate. Over the past decade Fannie and Freddie bought millions of loans from banks (and former banks) like Bank of America, Countrywide, Wells Fargo, Chase, Washington Mutual, Wachovia, etc. When so many of these loans went bad, the GSEs holding them were almost brought to the point of insolvency. Only the multi-billion dollar bailout by you and me has kept them, and the critically important secondary loan market, on life support.
Now the GSEs are repenting for their past sins by strengthening their guidelines (and increasing their fees – another post) to the point where every bank loan underwriter’s job depends upon the bank meeting all of the new criteria. The problem is twofold. One is that Fannie and Freddie keep changing their underwriting (qualifying) guidelines, so banks are constantly trying to adjust to the new requirements so that they can sell the loans. Two, the underwriting of these loans is getting stricter. The interpretation of tax returns, savings accounts, IRAs, various credit card debt, income, etc., for any applicant is subjective. One underwriter may approve and the next (there’s almost always a “next” underwriter now) may reject the same buyer’s qualifications. Paranoia reins in the secret, dark, underwriting rooms buried in the cold, wet basements of America’s banks. Try to speak to (much less reason with) an underwriter who has misinterpreted your financial data and rejected your loan application. I dare you. You will find it next to impossible.
Over the past couple of years, we have seen many examples of this arbitrary process. Shopping for a loan these days is much more challenging due to the new rules (Google GFEs or “Good Faith Estimates” for more info) that were supposed to protect the borrower but, instead, have made it more difficult.
The reality is that they have messed things up royally. The message to buyers is to hook up early with a lender or mortgage broker you can trust, one who is experienced and who is sincerely looking out for you and not just selling you a loan and collecting his or her fees. If you don’t know one, we do.
Do not underestimate the fact that constantly changing underwriting guidelines such as FICO (credit) scores, debt-to-income ratios, even credit card charges during escrow can adversely affect not only the cost of the loan, but your ability to get one.
Oh, and one more thing. Fannie and Freddie are not just making it harder to qualify for a home loan but are adding risk-based fees that most buyers, even ones with high FICO scores, will have the honor of paying in order to obtain financing. So you have an 800 FICO and 20% down? Sweet. But you will still have to pay a “risk-based” premium.
And, for inquiring minds, here is a fun little article from the LA Times on the subject.