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.