If you've not been in a lender's office for some time yet plan to seek a new mortgage or refinance, brace yourself for surprises.
Gone are the breezy times when many lenders routinely stretched debt-to-income ratios, overlooked past credit problems or took a cavalier approach to the value of the property being financed. Mortgage experts say getting a home loan in 1991 has become a lot rougher for some than it used to be.
"Lenders are very concerned these days about the debt exposure of consumers. Someone out there with a shaky credit history may find it more difficult to get a mortgage than back in the mid-1980s, when the economy was rolling along and everybody figured there was no end to the boom," says Michael L. Wilson, deputy director of the U.S. League of Savings Institutions in Washington.
One signal of change is the decline of the "low-doc" or "no-doc" mortgage, which excused those who could come up with a large down payment from having to produce virtually any documentation on their income or debt loads. These days most mortgages are full documentation loans.
But there's more to the story than the near-extinction of low- or no-doc loans. Even when it comes to traditional documentation loans, lenders are getting more demanding and nit-picky about paperwork, mortgage specialists say.
"Lenders are going into that dot the 'i' and cross the 't' situation," says Buddy Koolhof, Owings Mills branch manager for NVR Mortgage, a mortgage lending firm.
Nervousness on the part of lenders is the main explanation for their current, stricter interpretation of lending standards, known
in the trade as "underwriting guidelines." The guidelines are set by such quasi-governmental agencies as Fannie Mae and Freddie Mac, which buy a large proportion of the mortgages made by lenders. This is the so-called "secondary mortgage market."
Fannie Mae and Freddie Mac don't demand that a loan they buy meet their guidelines in all cases. But if the borrowers cease making payments on the loan and an audit shows that the lender didn't meet the guidelines, the secondary market agency can force the lender to buy the bad loan back. That's a lender's nightmare and one that's been occurring with more frequency in recent months.
"The major lenders are experiencing higher delinquencies, and that's what's pushing the more rigorous documentation," says Mr. Koolhof, the Owings Mills lender.
Many lending institutions are also becoming intensely aware of mortgage guidelines because of increased scrutiny by federal regulators in the wake of problems with so many U.S. financial institutions.
These days government examiners are taking a closer look at both residential and commercial real estate loans originated by lenders. "It's known as the 'regulatory reign of terror,' " says Mr. Wilson of the U.S. League of Savings Institutions, which represents 2,500 thrifts.
Still, the stricter atmosphere in mortgage lending offices need not intimidate those with reasonable credit histories who are well versed in the art of getting a mortgage.
"It's true that the whole lending environment has gotten more conservative. But for the average homebuyer, it's not so conservative that they're being frozen out of the market. There are just more hoops to jump through," says Peter G. Miller of Silver Spring, author of the HarperCollins book "The Common-sense Mortgage."
Here are pointers from mortgage specialists on how to cope in a more demanding lending environment:
* Try to keep your credit record as clean as possible in advance of making a new mortgage application.
"If you anticipate having a problem making a payment, call the creditor prior to the problem rather than waiting for the creditor to call you," NVR's Mr. Koolhof says.
In the past, the collection departments of many companies took a hardball approach when a borrower faced a problem. "You pay, you stay; you don't, you won't," was the prevailing attitude of many mortgage collectors, Mr. Koolhof recalls.
But today when you call a creditor you're more likely to reach someone who operates like a credit counselor than a hardball collector. If you're facing a legitimate, short-term cash flow problem, these people are more likely than before to help you set up an arrangement that will preserve your credit rating and spare you penalties. Anyway, there's no harm in trying.
* Prepare in advance for a mortgage application by gaining copies of your credit reports.
Find out which two credit reporting agencies are most commonly used in your community by calling local lenders and asking them which credit bureaus they engage. For a nominal sum (free if you've recently been denied credit) you can obtain copies of your credit reports from these agencies.
It's important to know in advance what information appears on your credit reports so you can correct it or prepare an explanation before the lending officer gets his hands on your reports. It's not unusual for people with common names to have mistaken information on their credit reports or for a father and son to have mix-ups if the younger man is a "junior."
* Come clean about blotches in your credit or employment history when you first approach the lending officer to make an application.
Many people seek to cover up blotches when they first approach the lender. You may be hesitant to disclose a past bankruptcy, period of unemployment, late payments or other worrisome elements in your personal history.
But the fact is that this information will undoubtedly come out during the course of the mortgage processing period. And one who conceals pertinent information at the outset raises a lender's suspicions and reduces the chance of getting a loan.
* Don't just assume that your problem is insurmountable.
Some lenders won't go near an applicant who discharged debts in bankruptcy during the last seven years. But an increasing number will accept an applicant who has gone through bankruptcy as recently as two years ago -- assuming he has a reasonable explanation for his situation and discloses all the pertinent facts.
By the same token, some people worry needlessly about late payments. A payment that is less than 30 days late often doesn't even show up as a negative on a credit report, Mr. Koolhof points out. "What's bad credit in the eyes of one person may not be in the eyes of the lender."