For the first half of the first decade of the 21st century, getting a home loan was no big deal. Banks were eager-almost desperate-to give money to people who wanted to buy homes. A big reason was that the housing market was propping up an out of control economy. Debt was good, was the common wisdom. It was good for the economy, it was good for homebuyers and it was particularly good for the banks.
Flash forward five years to a completely different mortgage-lending planet. Loans are seemingly impossible to get. Banks won’t give you money until you can prove you’ll give them your first- born and are making at least six figures (not including the decimal point.) Or, so you would think, to hear some of the stories.
The new reality is not as bad as many think. But lenders are demanding more paperwork, more proof and higher credit scores than they were just a couple
of years ago. “It’s old school now, the way it was way back when in the early 1990s,” said Kris Rausch, a mortgage loan consultant who works out of the South Minneapolis office of Coldwell Banker Burnet.
Right now, lenders offering conventional loans are looking for credit scores of 680 or higher, and borrowers must prove that they have cash in reserve to cover two months of PITI-principle, interest, taxes and insurance-for any property they want to purchase. Lenders are also paying attention to debt. High debt-to-income ratios will cause lenders to veto loans, no matter how much money is coming in.
FHA loans are more forgiving. These loans need only a 620 credit score, but the interest rates on these may be higher. FHA loans will also allow higher debt-to-income ratios than conventional loans. The debt that counts is long-term debt such as student loans, car payments and some credit card debt. It also includes the monthly house payments if the mortgage is granted.
Most lenders are also looking at employment histories and want to see two to five years at the same job. Exceptions are for people who have moved to a similar job (or better) in the same industry or who have gotten promotions.
“What we don’t want to see is job hopping,” said Rausch. “People who work for a place for a few months, decide they don’t like it and quit over and over are going to have problems getting a mortgage.”
The days of stated income applications are gone. Originally designed for the self-employed, lenders are now asking those who work for themselves for proof of income, requiring two years’ worth of tax returns and bank statements showing net (not gross) income. “Since tax returns for the self-employed show income minus business expenses, it can make it very hard for a self-employed person to get a mortgage,” Rausch said. “But it’s not cut and dried.” Anyone who is self-employed should seek the advice of a mortgage lender or a tax attorney. Even those who have incorporated their business can face obstacles when applying for a home loan. Lenders look at corporate returns, checking the profits and losses that they can use that to deny a mortgage.
Those just out of school have an easier time of it. Recent college students have to show transcripts (grades don’t count) to prove that they were actually in school and not sitting at home playing video games. They also need to show that they have, or have been offered, a job with adequate income to afford the house they want.
Couples seeking a mortgage loan can exclude one person if that person’s debt is too high, but doing that would also exclude their income. This can add complications in case of a divorce because only one person’s name would be on the mortgage and he or she would be responsible for payments even after a divorce. There are cases where people lose their homes because of a divorce because the mortgage holder alone cannot afford payments after the split.
One of the biggest changes is the minimum required down payments which have, in many cases, more than doubled. Many lenders are insisting on a 10 percent down payment for conventional loans in addition to closing costs and fees.
Some FHA loans with smaller down payments-these can be as low as 3.5 percent-often have higher interest rates. One of the only zero down programs still available is only for those eligible for VA loans. There is talk about new programs, possibly offered through state agencies, which may or may not offer a zero down option. Announcements about this are expected very soon. There are also special loans and grants available from a number of community agencies and nonprofits to help with down payments.
There is some good news. Those who qualify for a mortgage loan will benefit from historically low interest rates, and the savings over the course of a 30-year loan will be in the tens of thousands, possibly more. For those with good credit, low debt-to-income ratios, enough savings to cover down payments with a couple of month’s worth of additional savings “just in case,” getting a loan to buy a home right now is a very good idea.
For those who can’t get a mortgage in today’s market but want to do so in the future, the advice from lenders is simple: Keep your debt low, increase your savings, stay employed and do what you can to get and maintain a high credit score. There are still numerous opportunities for getting a mortgage and buying a home. It’s just harder than it once was.
Stephanie Fox is a real estate agent at Coldwell Banker Burnet in Minneapolis. She is a Certified Buyer’s Representative and specializes in first- and second-time buyers.