Home financing isn’t the automatic slam-dunk it used to be. But it’s not impossible, either. Despite tightened regulations, area lenders are starting to see a light at the end of the tunnel.
“A key question in any refinancing situation is, How is the home going to appraise?” says senior vice president Ruth Battle. “Lenders are really crossing their t’s and dotting their i’s these days. ‘Drive-by’ appraisals, so common before the market crashed, are no longer acceptable to Fannie Mae and Freddie Mac, except if the loan-to-value ratio is very low and the client’s credit score is high.”
Last year, in hope of obtaining accurate, objective home appraisals, lenders adopted a set of rules known as the Home Valuation Code of Conduct (HVCC), Battle says. “Individual loan officers can no longer choose appraisers, and they also can’t inform appraisers of what a home must be valued at to make the deal work.” This is a positive development, she adds, but some of the larger lenders have been relying on appraisal management companies, or AMCs, to choose appraisers. “Appraisers chosen by AMCs aren’t necessarily market experts,” Battle says. “An appraiser from Festus isn’t familiar with the Ladue market, so there’s no way he can fairly evaluate the property. That makes it much harder to refinance, because appraisals are more likely to fall short of what the market will bear.”
Some lenders are demanding 20 percent downpayments before approving a loan, but conventional loans are available for 5 percent down; FHA loans for less. “And veterans can still get 100 percent financing on loans up to $417,000 without a downpayment, provided they show their certificate of eligibility from the VA,” Battle says.
Even the high-end market is starting to loosen up, she reports. “Until recently, it was hard to get a jumbo loan, but things are changing. Banks aren’t as spooked as they used to be, as long as the client has a solid credit score and adequate income.” If clients have their heart set on an expensive home, “they can split it into two loans, a first and second mortgage, one for $417,000 and a second for the rest. If you try to swing it with a single loan, rates are higher and qualifications change.”
“Refinancing is at peak levels now due to the recent drop in interest rates,” says mortgage banker Mark Cooper. “Good quality loans, based on documented income, assets and credit scores, are getting approved. The qualifications needed to obtain mortgage insurance, which is typically required, have tightened over the past year, with higher credit scores and lower debt-to-income ratios necessary.”
Cooper agrees with Battle that the HVCC appraisal guidelines are among the biggest hurdles to refinancing these days. “But in some cases, if the current loan is a Fannie Mae or Freddie Mac, we can create a new loan for our clients without the requirement of a new appraisal,” he says. “These loans are subject to restrictions, but helped tremendously over the past year when property values declined in most areas.”
In June, Fannie Mae initiated a new Loan Quality Initiative (LQI) to tighten underwriting requirements and reduce borrower fraud, Cooper reports. “LQI helps ensure that loans meet credit and other requirements.” On the minus side, these rules could prevent closings for buyers who rack up credit card charges before their homes have sold. “But on the plus side, LQI can prevent problem loans from ever closing, which will in turn reduce the number of loans that lenders have to repurchase from Fannie Mae because of people defaulting.”
Cooper says the biggest change in the mortgage industry is the new licensing requirement, established in January. “All non-bank loan originators must now take 20 hours of continuing education, pass a test with a score of 75 percent or better, and submit a background check and credit report to the state to obtain a license,” he says. “It weeds out a lot of bad apples.” Generally, tightened regulations benefit both lenders and clients, he adds. “It used to be way too easy to get a mortgage. That’s what caused so much trouble in the first place.”