Kiplinger article on current mortgage lending standards - how accurate in reality?

[mshan]

Mortgages: Stricter Rules

Mortgage lenders want to make loans now, and they may even bid against one another for your business. But lending standards remain tight, and you must be prepared to produce a mound of paperwork to document your income and assets.

Rates are as low as they were in the 1950s, so going through the motions could pay off. In mid September, the average interest rate for a 30-year, fixed-rate conforming loan -- a mortgage of $417,000 or less -- was 4.5%, according to HSH Associates, a mortgage-tracking firm. The initial rate for a 5/1 adjustable-rate mortgage (a fixed rate for five years, followed by annual adjustments) was 3.6%.

Fannie Mae, Freddie Mac and the Federal Housing Administration continue to dominate the mortgage market, setting the standards for the loans that lenders make and sell to investors. So lenders strive to dot every i and cross every t when they qualify you.

If you're buying or refinancing the mortgage on your primary home, you'll need a minimum down payment of 5% to 10% for a conforming loan or 10% to 15% for a conforming jumbo loan (125% of a metro area's median home price, up to $729,750). With 20% or more down, you avoid private mortgage insurance, which typically costs 0.5% to 1.5% of your loan amount per year.

Fannie Mae and Freddie Mac allow a minimum credit score of 620 if you have at least 25% equity in the property or a score of 660 with equity of less than 25%; you'll get the best rate if your score exceeds 720. The FHA will soon require a minimum credit score of 580 to qualify with a down payment of 3.5%, but FHA lenders often impose a higher minimum score of 670.

In addition to your credit, lenders will also scrutinize your ability to pay, starting with your ratio of debt to income. Monthly housing expenses (principal, interest, taxes, hazard insurance, private mortgage insurance and association fees) shouldn't account for more than 28% of gross monthly income. Total debt shouldn't exceed 36% of gross income, but in some cases lenders stretch the maximum to 45%.

Chris Bennett, a loan officer with HomeServices Lending, in Charlotte, N.C., says that he surprises borrowers "all the time" with preapproval of their loan when they aren't expecting it. Even people with lower credit scores may qualify if they have stable employment, a history of paying rent and credit lines on time, and money in the bank or in a retirement account.

However, Bennett also counsels some borrowers to delay their home purchase long enough to improve their credit score, eliminate debt, get a raise and save more money. They might earn a better interest rate, improving their buying power. Plus, he says, "it's not good to lay out every bit of cash you have if you won't have money for a rainy day."

Prove it. At a minimum, you must supply your pay stubs for the past 30 days and W-2 forms for the past two years. Lenders will want to see bank, retirement-account and investment statements for the past 60 days. Bennett says three types of borrowers will face additional requirements:

If you're self-employed or if 25% or more of your income is from commissions or bonuses, you must provide two years of tax returns. Lenders will average your income over the past two years to figure your debt-to-income ratio. If you have pursued opportunities to reduce your taxable income, you may not have sufficient income to qualify even though you may have a lot of money in the bank. Community banks, credit unions and other lenders that typically keep their loans on their own books are the best bet for borrowers with low incomes and high assets, says Bennett.

If you want to rent out your home and buy a new one, you must provide a signed lease for a minimum of 12 months. You can use only 75% of rental income to help qualify for the mortgage, and you must have at least 30% equity in your former home.

If you and your spouse are relocating for work and your spouse doesn't have a job yet, you must qualify for the loan based on one income unless your spouse has a signed agreement with an employer to begin work within 45 days of closing the loan.

Even if you qualify, you can throw a monkey wrench into the final loan approval if you take on new debt that could affect your credit score or your debt-to-income ratio. Some lenders pull another credit report just before closing. Another possible sticking point is the appraisal. Overly generous appraisals helped to fuel the housing bubble. Now, miserly ones may thwart your closing, says Guy Cecala, publisher of the newsletter Inside Mortgage Finance. Lenders will estimate the value of your home conservatively, and appraisers are generally following suit, especially if the local market is in flux. http://finance.yahoo.com/loans/arti...NlYwNhcnRpY2xlTWFpbgRzbGsDMQ--?mod=loans-home

Just wondering how accurate it's mortgage requirements are vs. people's actual real world experience in terms of getting a mortgage?

 

[KMc]

Seems accurate per my recent experience. I just refinanced last month. Take particular note of the point on appraisals, especially when refinancing. That 20% equity you thought you had, might not be the case anymore.

 

[Slew Foot]

Im buying a house soon and that seems fairly accurate. I need two years of tax returns, a couple months of paystubs/bank statements/etc.. My wife is self employed but shes only been in business for one year and they wouldnt consider her income.

 

[Codewiz]

Just refinanced. Wife and I have >750 credit scores and had no issue. Had to provide 3 months of paystubs and last years tax return.

Process was pretty easy outside of the appraisal. My house appraised fine but the appraiser kept screwing up the actual document. First he had the wrong name on it. Then there were inconsistencies in the document.

All in all, it took about 6 weeks end to end to refinance.

 

[Cookie]

If you want to rent out your home and buy a new one, you must provide a signed lease for a minimum of 12 months. You can use only 75% of rental income to help qualify for the mortgage, and you must have at least 30% equity in your former home.

I did this with at BEST 2% equity on my former home. More likely it was less as I'd only owned it 1 year. I could use 75% of rental income to help qualify iirc, but some lenders were as low as 50%

PS. I did need to include the lease (for the upstairs portion, I lived downstairs at the time I was purchasing)

 

[alkemyst]

I work for a mortgage company. This is pretty accurate.

Many of our customers get really mad stating [in the past] they could do this with no income and no asset verification. Plus no down payment.

Fortunately we still are not back to 20% down payments.

3-5%, good credit and good documentation gets you a home today.

 

[SunnyD]

I'll answer this hopefully next week for you. 🙂

 

[Patranus]

Aren't we all glad that government pushed home ownership?
Hare to ruin it for the rest of us.

 

[mshan]

If you have a high credit score and conservative total debt to income ratios, can you get best rates available with 3 - 5% down, or do you still need at least 20% for that?

Also, do they require PMI with the 3 - 5% down?

How much rate bump for each of above?

 

[alkemyst]

If you have a high credit score and conservative total debt to income ratios, can you get best rates available with 3 - 5% down, or do you still need at least 20% for that?

Also, do they require PMI with the 3 - 5% down?

How much rate bump for each of above?

more money down always can get you a better rate.

Right now with historical lows it's not really worth it for most.

What price point are you buying at? If a JUMBO loan then the more money down the better.

If a normal house then it really doesn't work out unless you are positive this is where you want to live your whole live.

 

[mshan]

I already own a condo.

My sister is selling her condo and I am trying to gauge what sort of requirements potentials buyers would face in getting a mortgage.

 

[alkemyst]

she may not qualify for all the best programs since she "owns".

without more details though we are all just making pot shots.

 

[endervalentine]

refi last month and it was painless, although out LTV ratio was pretty low. It's kinda sucks how you need 30% for a rental was starting to look around for a place to rent out but w/ 30%, it might be tough to get 🙁

 

[mshan]

She isn't looking to buy right now.

I was just wondering how difficult potential buyers of her condo would have getting a mortgage.

She may buy in a year or two, but hopefully her current condo would be sold by then.