Before the financial meltdown in 2008, prospective home owners breezed through the lending process while pursuing the American dream. Now, even veteran borrowers can be stymied by today’s strict 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 surmount modern obstacles and realize their dreams.
“The pendulum has swung too far the other way and now lenders are looking for picture-perfect borrowers,” says Janette Mah, senior vice president and manager of the Residential Mortgage Group at Wilshire State Bank. “Borrowers can avoid frustration and disappointment by educating themselves on the underwriting process, meeting with lenders and securing pre-approval for a loan before they start shopping for a home.”
Smart Business spoke with Mah about the current mortgage climate and why borrowers need education and preparation to prevail.
How has the lending climate changed, especially in the greater L.A. area?
Lenders are being somewhat cautious because the economy and the housing market are sending mixed signals about their overall health. Unemployment is still very high, the economy is struggling and some areas in Southern California are still working through a backlog of foreclosed properties, which is keeping residential real estate prices from stabilizing. While the federal government will continue to play a role in securitizing long-term mortgages, the future of Freddie Mac and Fannie Mae is up in the air. After synthesizing all this information, it’s clear that homebuyers and lenders must approach the market with caution and diligently assess the risks before finalizing a transaction.
What should borrowers know about the current underwriting rules and mortgage qualification process?
Borrowers can no longer state their income; they must provide sufficient documentation to verify their earnings and assets in order to prove they can repay the loan. In addition, lenders are using a new set of standards to underwrite and evaluate risks, and while the requirements may differ for some programs including FHA loans, these are the general guidelines.
- Minimum credit score of 640 to 660 and a history of financial responsibility and saving. Borrowers can drive a better deal if their credit score is 740 or higher.
- Employment stability.
- Sufficient liquid assets to survive a temporary financial set back.
- Minimum down payment of 20 percent, and the funds must be in the borrower’s account for at least two to three 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. Remember, even deferred payments on a student loan will count toward your monthly liabilities.
How can borrowers prepare for the lending process?
First, know your credit score by pulling a copy of your report and taking the time to clear up any issues before you approach a lender.
Second, research the various loan products to identify one that meets your needs. If you plan to stay in your home for more than seven years, then a 30-year or 15-year fixed rate mortgage might be the best choice, while a loan that offers a fixed rate for just five years might be appropriate if you plan to sell the property in a few years.
Third, study the lending process so you’re familiar with the paperwork and the requirements you’ll have to satisfy along the way.
Finally, calculate your income-to-debt ratio and research the real estate market, so you know how much money you need to buy a house and approximately how much you can borrow before you meet with a lender.
What’s the best way to approach a lender and avoid mortgage scams?
Contact two to three lenders to request face-to-face meetings and a quote. While it’s a good idea to survey the market by searching the Internet, borrowers generally get the best deal from a bank where they have an existing relationship. Vet the contenders by asking for their license number and searching for information on the licensing authority’s website. New legislation has granted consumers additional protection from fraud and scams following the crisis of 2008, so now mortgage originators are required to register and undergo a background check in order to comply with the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act).
Total out-of-pocket costs for a 30-year fixed rate loan should average $1,500 to $3,000 and buyers should ask for a written estimate before agreeing to a deal. Lock in your interest rate for as long as possible so you can boldly tout your pre-approved status to realtors and sellers and negotiate with confidence when shopping for a home. Finally, remember to allow plenty of time when you finally locate the home of your dreams, because the underwriting and escrow process takes a minimum of 30 days.
Janette Mah is a senior vice president and manager of the Residential Mortgage Group at Wilshire State Bank. Reach her at (213) 427-1490 or [email protected]