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Got the right stuff for loan? Then prove it
Check your credit report and start digging for documents. A handshake, broad smile and verbal income estimate no longer will yield a mortgage but lenders still are looking for more than a few good borrowers.
It's true that many consumers who secured mortgages during the housing market's more halcyon days wouldn't qualify in the current credit environment, as both mortgage lenders and mortgage insurance companies tighten their standards. But area lenders say that's because the industry got away from the traditional rules of the game, where borrowers had to show they had the credit history and cash stream to afford a home.
Now the pendulum has swung back to where it was eight to 10 years ago, where banks and mortgage companies only want to help put you in a new home if you can afford to stay there. Those are the people truly benefiting from the buyer's market.
"There's a lot of things out there that are truly doom and gloom," said Jeanette Martinez, a mortgage banker at Preferred Mortgage Partners, Chicago. "This is an advantage for people who have good credit scores and who still have money to put down on a property, people who maybe couldn't afford the price appreciation of a few years ago."
Paul Gaughan, president of Metrpolitan Bank, calls it a "back to the basics" approach for both lenders, who've been stung by losses, and for buyers, who have to live within their means.
That means taking a realistic look at fixed monthly expenditures and loan payments. Among the traditional ratios Metropolitan looks at: A mortgage payment shouldn't exceed 28 percent of a buyer's gross income, and a mortgage plus other debt like auto loans or student loans should not exceed 36 percent of gross income. Two years ago, Metropolitan as well as Chase sold 50 to 60 percent of the mortgage loans they wrote to mortgage finance companies Fannie Mae and Freddie Mac. That business has climbed to 90 percent so their lending standards have to conform to Fannie and Freddie's guidelines.
But it still pays to shop around because mortgage rates can vary, depending on the down payment offered. Borrowers with better credit, FICO scores of 720 to 740 or above and a loan to value ratio of 80 percent, are receiving the best rates.
A credit score in the mid-600s to 700 and a higher loan to value is likely to mean a higher interest rate, but possibly by as little as 0.25 percentage point.
Consumers tight on cash also should investigate offers by some lenders to pay less in closing costs but take a higher interest rate.
Mortgage lenders stress that in today's environment, know your financial health beforehand and bring all that documentation to the lender. Find at least the most recent W-2 earnings statement and income tax return. Self-employed home buyers may need to bring a few year's worth to prove a steady income stream.
"Most of the people that are coming in understand that the market's changed and what's predominantly changed is stated income has gone away," said Victor Ciardelli III, chief executive of Guaranteed Rate, who estimates that 30 to 40 percent of the homeowners who received loans in 2006 no longer would qualify. "They're asking you to put some skin in the game now."
Down payments can range from 10 percent with mortgage insurance to 20 percent without it.
Programs available through qualified lenders, and insured by the Federal Housing Administration, that were once used mainly by low- to moderate-income borrowers, are growing in popularity and enable borrowers to put as little as 3 percent down for a home. However, under the new housing bill, the down payment requirement would increase to 31/2 percent.
Employment verification also will be checked, so save the lender a step and get the name of the person at your company who can verify you work there.
Lenders also say it looks better if a borrower has been in the same industry for several years.
In July, major banks and financial firms reported second-quarter earnings that weren't quite as dire as expected. But with so much speculation about whether the housing markets' machinations will lead to additional credit losses, lenders are likely to stick with current guidelines for some time.
"We want to make loans, but we want to make sure they are loans that people can afford over the long term," said Thomas Kelly, a spokesman at Chase.