Before the financial meltdown in 2008, prospective homeowners breezed through the lending process while pursuing the American dream. Now, even veteran borrowers can be stymied by today’s stricter lending environment, especially if they rely on previous knowledge and experience to navigate the process.
“Fortunately, education, preparation and a little perseverance can help novices as well as seasoned borrowers take advantage of historically low interest rates and home prices,” says Marc Reneau, first vice president of consumer lending at First State Bank. “And there are new programs that may allow owners to refinance an ‘underwater’ mortgage (in which they owe more than the house is worth) that were not previously available.”
Smart Business spoke with Reneau about the current mortgage climate and how education and preparation will help borrowers through the process.
How has mortgage lending changed, especially in Southeastern Michigan?
Lending has been very challenging in Southeast Michigan, with lenders going out of business, new and updated regulations, declining housing values and the number of foreclosures. The good news is that there are definite signs of recovery.
However, lenders remain very careful. Gone are the days when you just stated your income. Now you must provide sufficient documentation to verify your earnings and assets in order to show you can repay the loan.
What should a consumer know about the current mortgage qualification process?
All information provided during the application process is validated. When applying for a mortgage, borrowers should be up front and answer all questions posed by their loan officer truthfully and completely. Today, lenders are using a new set of standards to underwrite and evaluate risks. While they may differ from lender to lender or by program, these are the general guidelines.
* Minimum credit score of 620 and a history of financial responsibility and saving. Borrowers can drive a better deal for a conventional loan if their credit score is 740 or higher; however, this does not apply to FHA loans.
* Proof of employment for the past two years and explanation of any gaps.
* Sufficient assets to survive a temporary financial setback. Borrowers should have six months of payments saved. These funds needn’t be liquid, and can be in the form of a 401(k) or other securities.
* Minimum down payment will vary depending upon the loan program and these funds must be in the borrower’s account for at least two months.
* Total monthly housing costs for principal and interest, taxes and insurance should not exceed 33 percent of gross income, while total monthly expenditures for all liabilities should not exceed 45 percent for conventional loans and 50 percent for FHA loans. Remember, even deferred payments on a student or other deferred loan count toward monthly liabilities.
How should consumers prepare for the lending process?
If borrowers are prepared, the process can still be quick and smooth. Borrowers will need, at a minimum, the most recent month’s pay stubs; most recent bank statement(s) including all pages (even if the last page is nothing more than an advertisement); the last two years’ W-2s; if there has been a recent divorce or bankruptcy, a copy of the divorce/bankruptcy papers is needed. Most important, all income must be verifiable. If the borrower plans to obtain a gift, there is a correct way to do so and the loan officer should be able to provide proper guidance.
What are some things consumers do unknowingly that can hinder their chances of obtaining a mortgage?
It’s important to keep spending in check while going through the application process. Borrowers should avoid buying or leasing a new car or trying to fill the new home with furniture with one of those ‘same as cash’ deals, as this is still considered debt and must be counted in the calculation for qualifying for a loan.
Lenders are required to obtain an updated credit report at the time of closing the loan to ensure nothing has changed between the time the borrower applied and the loan closing. If there has been a major purchase, especially on credit, borrowers will most likely need to explain it to the satisfaction of the underwriter before the loan can close.
Has anything changed for consumers who are unable to refinance due to their house being underwater?
There has been a lot in the news lately about a new and revamped government program for homeowners who owe more than their home is currently worth. Homeowners whose mortgage is owned by Fannie Mae or Freddie Mac (and was closed prior to April 2009) may qualify to refinance using the HARP 2.0 program (Home Affordable Refinance Program).
The key difference in this program is that it lifts the cap previously in place on the Loan to Value. Homeowners who are current with their monthly payments but are unable to refinance due to a drop in the value are the typical prime candidates for the new HARP program. Not all financial institutions will participate in this program and not all loans will be eligible. Homeowners should contact a loan officer they trust to see if they qualify.
The program is just taking shape as of March 2012 and it may take longer for these loans to process than conventional loans, but the program does not expire until Dec. 31, 2013, so there is time to take advantage.
Marc Reneau is first vice president of consumer lending at First State Bank. Reach him at (586) 447-4851 or [email protected]
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