Understanding Some of the New Rules for Mortgages

This is a guest post from Dale Siegel, whose book, The New Rules for Mortgages, I reviewed yesterday.

After the shockingly noisy implosion of the mortgage industry a little over two years ago, life changed for real estate buyers and owners forever after. Getting a mortgage seemed so easy that everyone was doing it. It was the cocktail conversation across America. Everybody had “a mortgage guy” and everybody was an expert on option arm mortgages and knew all there was to know about an interest only loan. Apparently not!

Not two years ago, anyone could get a mortgage that could simply prove they were breathing. An array of products offered by banks and Wall Street made it easy for most people to qualify for a loan. Often it was outside of what they really should borrower- if they should be getting a loan at all. The thirst for Wall Street to buy mortgages quickly and magically created an assortment of mortgages and qualifications to obtain them. Within a short time the American Dream became the American Nightmare! And here we are today; with even the most qualified of borrowers finding themselves unable to obtain a mortgage.

Why is it harder to qualify right now?

After the implosion of the mortgage industry and the reversal of the real estate market, there was an enormous global pull back on credit. Banks live on lending out mortgage money and then selling large pools of mortgages to investors. They replenish their money and lend it out all over again. If there are no investors out there ready to buy these mortgage pools, then the banks have to keep these mortgages in their own portfolios until they find a buyer. If they are retaining these mortgages, they will be much more selective in whom to lend money to.

Thus, the guidelines have become much stricter as far as credit scores, income to expense ratios and assets in reserves. The risk tolerance is almost zero now while banks begin to rebuild their mortgage pools. They want to show investors that their mortgages are “A” performing and riskless investments. When the secondary market opens up again and starts buying these mortgage pools, the money will flow a little faster and guidelines will loosen up.

What do I need to qualify for a mortgage in this climate?

Overall you need better credit history, you need to make more money and be able to prove it and you need to have money left over after the closing. Specifically, you need a FICO score of over 680 to get a mortgage with most lenders and a 720 score is the new “good” score. Most folks fall short of this, but they can still get a mortgage-probably at a slighter higher interest rate. In addition, no income verification loans are rare these days, so full disclosure of salary or self-employed income is a must. On top of these, lenders want your housing expense to be a much smaller portion of before tax dollars then they used to allow. Take it further, and lenders want to see that you have more than a few months housing payments in reserves after the closing. Of course, there are lenders out there that still offer no-income verification loans or bad credit loans, but if it sounds too good to be true, then it probably is.

What should I do if I'm self-employed in order to get qualified?

Self employed people are scrutinized more than ever before. First off, complete disclosure of personal and business income is a must. The lenders will want to see the last two to three years Federal Tax returns, with all schedules. The will also want to see the year to date income and expense of the company. So filing your tax returns and having your financials in order before you apply is a good idea.

On top of looking for solid financials, the lenders will analyze the type of profession you are in, your length of time and history in it, and your education and professional background. To boot, they will be checking out your industry and the probability of continued success in your geographic area. I kid you not!

How can I make myself more attractive to lenders?

There are three components to qualifying for a mortgage: credit, income to expense ratios and assets. The best things to do are, have a high credit score, owe less money overall and have a solid cushion post closing. The two biggest factors now are loan to value and FICO scores. The lower your credit score, the more money they want you to put down and vice-versa. I would say the best thing you can do it put down as much money as possible, especially if you have less than stellar credit.

What other options are there beyond banks?

There are several places from which a person can get a mortgage. The large commercial banks, such as Wells Fargo and Bank of America, the savings and loans, which are the local lenders and the third party mortgage providers such as mortgage bankers and brokers. In addition there are literally thousands of credit unions out there which are still solid and ready to lend out money. Credit unions are what I like to think of as smaller institutions with big hearts. A credit union might be able to stretch the borrower qualifications for a long time member or see the big picture by underwriting a mortgage with a personal touch. Other useful tools could be borrowing from a family member or doing short term financing with the seller. Harder to do these days, but those rich aunts come in handy.

What can I do if I am rejected?

If you get rejected for a mortgage, the first thing is to find out why. It could be something that can be rectified like requiring a larger down payment or paying off some credit card bills. The lender should be able to tell you right away what the reason is and offer alternatives if they exist. Ask your loan officer to help you analyze the loan as is and see if there are better solutions. Perhaps, you can borrow money from a relative and put down a larger down payment or pay off a big car loan. Maybe you can do some quick repair work to your credit report to get the FICO score up a few points. You don’t know unless you ask, however it also depends on how much time you have to work on it. If you are buying a home, you will have to meet mortgage commitment timelines and there is a seller involved that needs to close. If you are refinancing, there might be more time to work out the kinks or revisit the loan in a few months. Again, it all depends on your situation.

Whatever your situation might be make sure you are well educated in the terms and process of getting a mortgage now. The process has changed in that it is much more arduous and expensive to get a mortgage. A borrower will be asked to provide many more documents and review more disclosures prior to the closing. Make sure you have the time to do this and the wherewithal to hire professionals that will be looking out for your best interests. In these days of getting a mortgage, it is not who you know, but what you know. Be smart and be aware.


Dale Robyn Siegel is a licensed attorney in New York and owner of Circle Mortgage Group, a boutique mortgage broker in White Plains, New York. She is an adjunct professor at Baruch College as well as NYU Schack Institute of Real Estate. Dale has been speaking to the public and teaching real estate professionals about mortgage finance for the past ten years. You can learn more about The New Rules for Mortgages at http://www.thenewrulesformortgages.com, and you can purchase a copy here: http://www.amazon.com/Rules-Mortgages-Dale-Robyn-Siegel/dp/1592579485 To learn more about this virtual book tour, please visit http://virtualblogtour.blogspot.com/2009/09/new-rules-for-mortgages-by-dale-robyn.html.