Who’s Considered ‘Mortgage Ready’ in Today’s Credit Environment?

Gone are the days of “Stated Income” and “No Doc” mortgage loans. Subprime loans, Alt A loans and the exotic mortgages programs developed for borrower’s with tarnished credit, or borrower’s who couldn’t document income and assets are extinct. We are now in a credit world that has gone ‘Back to Basics’. How does this compare to a year ago, and how does a borrower determine that they are truly “Mortgage Ready” in today’s market?

During the real estate boom between 2003-2006 property values were increasing in staggering percentages. Borrowers were purchasing or refinancing with virtually no income documentation and/or credit history that was tarnished. Delinquent accounts charged off or in collections were not required to be paid off. A borrower could be one day out of bankruptcy and still get mortgage financing. Borrowers did not have to document where their down payment money came from. In some cases, specifically a No Doc loan, the borrower did not even have to disclose if they were employed! The phrase “anyone can get a mortgage” seemed true, with the downside to these type of mortgage programs being adjustable rate loans with higher interest rates. The thought process was ‘who care’s about that when the only criteria seemed to be that borrowers had at least a 500 credit score, and were alive and breathing’. The dollar amount of mortgages originations hit record highs and credit was flowing fast.

Then the bubble burst. Borrower’s adjustable rates started to reset, sometimes, increasing the interest rate by 5%. Property values started declining leaving borrowers with no equity in their property. In some cases, borrowers who financed 100% of the sales price, now may owe more than what the property is worth. Almost immediately investors stopped buying the exotic mortgage programs leaving borrowers frustrated that they couldn’t refinance their existing mortgage because they were unable to meet the changing underwriting requirements.

So here we are in 2009 after the mortgage meltdown. Mortgage financing is available. Even though what you hear in TV or the internet headlines may suggest otherwise. Rates are still relatively low. Home prices are becoming affordable. A casualty of the meltdown is there are less programs today versus hundreds of first time home buyer programs available two years ago. Conventional, FHA, and VA financing being the most popular choices, and are all backed by the US Government.

The underwriting requirements today are different than what they were 2-3 years ago. Below are a few noted changes:

• Borrower’s now have to show a satisfactory credit history that they pay their debts on time, normally a 2 year current history.
• Many lenders require a minimum credit score of 620
• Borrower’s have to show evidence of income by supplying W2’s, tax returns and pay stubs.
• Lenders are verifying these figures directly with the IRS. Ratio requirements, the ratio between a borrower’s income against their total monthly payments, usually can’t exceed the range of 41-45%. The remaining 55-59% leaves room for borrowers to afford groceries, gas, hair cuts, utilities, etc.
• Borrower’s have to provide evidence of assets for down payment and closing costs.
• The FHA down payment requirement is just 3.5% of the sales price of which can come from a gift from a family member.
• The Federal Housing Finance Agency (FHFA), who controls Fannie Mae and Freddie Mac under the current conservatorship, has implemented the Home Valuation Code of Conduct.
• This revision requires Lenders to change the process in selecting appraisers in an attempt to mitigate any type of influenced appraised values. In other words, this will ensure the current value of the home is not artificially inflated but truly worth the value based on other sales.

“Mortgage Ready” means all of the above. You may be “Mortgage Ready” and not know it. Contact a mortgage professional to discuss your financial situation. Mortgage professionals will help you determine how much you can borrower based on your income. They will order a credit report. And if your credit history is tarnished at the current time, a mortgage professional can give you steps on how to clean up your credit to become “Mortgage Ready”.

Even though some of the more exotic mortgage programs aren’t available anymore, buyers can now be more confident that the home they purchase will be affordable for them in the long term. No surprises.

By Kimberly Neilson, Executive Vice President, McCue Mortgage Company