After a period when too many lenders focused just on getting people into homes, and not on whether they could afford them-the pendulum has swung back in the other direction. The number of mortgage products offered to consumers has shrunk, while the amount of income documentation required of borrowers has increased. “It is now going back to how things were done 10 plus years ago” says Jim Bennison, a senior vice president with a Genworth Mortgage Insurance Company out of Raleigh, NC.
The underwriting standards for borrowers are now being dictated almost entirely by three government entities that have come to dominate the mortgage market: the Federal Housing Administration, Fannie Mae, and Freddie Mac.
A bank today is highly unlikely to issue a mortgage that won't be guaranteed by anyone of these three. A few years ago, a buyer might have found the house their dreams and then worried about how to finance it. Now, getting pre-qualified for a loan should be one of the first steps. “People need to call a mortgage professional earlier in the process than they think”. says James Garcia President and CEO of Confidence Mortgage, based in Albuquerque, NM. “The very moment you think, ‘I might want to buy a house', someone like me should be the next phone call.”
Regardless what people may currently think, there are good loans available for qualified buyers and interest rates are at an historic low. One option that has become attractive, particularly for first-time buyers, is FHA loans, which require borrowers to put down just 3.5% if they have a credit score of 580 or above. By comparison, to qualify for a low-rate conventional mortgage, a buyer will need a credit score of about 740.
The number of loans being insured by FHA has exploded in the past three years as Wall Street stopped buying up mortgage-backed securities. FHA loans don't require a borrower to have private mortgage insurance, but anyone else who can't put 20 percent down is typically required to get PMI.
Both first-time home buyers and repeat buyers should expect lenders to take into account what their loan-to-income ratio is. From 2002-2006, it was not unusual to see homeowners whos total debt, including their mortgage payment to take up 55% or more of their income.
Today, banks want total debt to be in the 40 to 45 percent range, which is in line with historical lending standards. If you know what you can afford, you're not going to get yourself into too much house.