If you're looking to buy a house, you've probably seen the headlines: Home prices are way down from just a few years ago, interest rates are at an all-time low since 1971, but mortgages are harder to get.
While it's true that buyers must bring more to the table, and lenders are pickier, the recent changes in the home buying process should not frighten you away.
"Don't just assume that you can't get a loan. You might be mistaken," says Nick Parisi, senior vice president of Standard Bank & Trust in Hickory Hills. "One would think from reading the news that unless you have 25 percent down and an 800 credit score, you can't buy a house, and that couldn't be further from the truth. You can still get a conventional loan with 5 percent down, if you get private mortgage insurance [PMI]."
Frank Binetti, past president of the Illinois Mortgage Bankers Association and president of Inland Home Mortgage Company in Hillside agrees.
"It's not true that you need 20 percent down. However, the lower your down payment, and the less you have on your credit background, the more expensive it will be. The banks are just taking an overall conservative approach."
What does that mean for a homebuyer today? The days of so-called "no-documentation" loans are over. Borrowers have to produce a lot of detailed records, like a history of steady employment, bank statements, a reasonable debt to income ratio, and a good credit score.
The banks swing back to conservative lending is not just to protect their assets; it's designed to protect consumers, too. The thinking goes that raising the requirements and the burden of proof to get a loan protects borrowers from biting off more than they can chew, thus helping to prevent foreclosure. This, in turn, protects neighborhoods from foreclosure fallout: empty homes, and declining property values.
"As bankers, we live in the communities we work in, and we want to make sure we are doing what's best for everyone in the community," Parisi says.
The three F's
Many home buying changes have come from organizations with familiar sounding names: Fannie Mae, Freddie Mac and the FHA. None of these are lenders, but they influence the majority of lenders. Taken together, the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac now back more than 95 percent of new mortgages today, so banks pay attention when they issue lending "guidelines."
Freddie Mac and Fannie Mae are shareholder owned, government sponsored companies that buy mortgages from banks that meet their guidelines. They currently hold approximately 60 percent of all this country's home mortgages.
The FHA insures loans that lenders make, but those loans and the homes they pay for must meet the FHA's many requirements. In 2006, at the height of the housing boom, the FHA's share of the mortgage market was 2 percent; today it's around 30 percent, because its policies favor those with lower credit scores and less cash for down payments. A lot of buyers today are able to buy a home using FHA mortgages, which can be obtained from any lender.
One thing buyers noticed this year is that credit score requirements have gone up. Fannie Mae essentially set the basement at 620 (out of 850 possible) at the end of last year; formerly it was 580. However, Fannie Mae spokeswoman Janis Smith notes that the credit score is part of a whole matrix of eligibility factors, and the requirement can vary slightly depending on the type of loan and its terms.
The FHA wants to see a minimum credit score of 580, but only if the borrower wants to put as little as 3.5 percent down. Those with credit scores of less than 580 might still get an FHA loan, but they must have 10 percent to put down.
The FHA has made other changes this year. The upfront insurance premium (kind of like PMI) that the seller must pay at closing went up to 2.25 percent from 1.75 percent. That means if you take out a $300,000 loan, you will now pay $6,750 in premium instead of $5,250. Also, the annual insurance premium payment is now .55 percent, which would start out at $16.50 per month on that $300,000 loan. It would go down as you pay off the loan.
Another change the FHA made concerns condo buyers. Previously, a buyer could purchase a condo in a building that was not FHA-approved if they got "spot approval" on the unit itself. The agency has completely eliminated spot approval, and all condo loans must be for units in FHA-approved buildings.
The FHA has temporarily relaxed its policy in one area: flipping. Previously it did not allow buyers to purchase a home from a seller who had owned it for less than 90 days. Now they can, until Feb. 1, 2011. This allows foreclosures to be more readily available to the public.
On the bright side, "the time from application to closing is shorter than it has been in the past," says an FHA spokesperson. "We've always required documentation of occupation, employment, income, collateral. That hasn't changed."
In the third quarter, rates on a 30-year fixed conventional mortgage ($417,000 or smaller) dropped into the 4 percents, and 15-year fixed mortgages dipped below 4 percent. Rates on 30-year fixed jumbo loans (those for amounts above $417,000) were in the 5 percents. Numbers like those haven't been seen since the Nixon administration-before many of today's first-time homebuyers were even born.
You don't have to remember the Watergate years to get the message. Just 11 years ago, at the end of summer 1999, lenders were quoting 8.15 percent on a 30-year fixed mortgage, according to Freddie Mac. Flash back to the last recession during the fall of 1981, and borrowers were paying an unthinkable 18.45 percent.
Most bankers think rates will rise again, the only question is when. The Mortgage Bankers Association says this will occur in the fourth quarter of this year. Their advice: buy now, if you can.
"It's the best of both worlds: low interest rates and low prices," says Parisi. "Historically, rates drop and home prices go up. But the availability of housing is at an all time high as well."Copyright © 2015, The Baltimore Sun