It should come as no surprise that as a result of the sub-prime home loan crisis, the tough economy and the slumping real estate market, the mortgage industry has undergone some serious changes lately. But what might surprise you is that for most borrowers, the news isn’t really bad. Three local experts clarify just what that means.
Barry Feldman, VP of Bank of America Mortgage, says borrowers can expect a greater emphasis on credit score and down payments. “The down payment required depends on a variety of factors, including the amount of money being borrowed and the lender you’re dealing with, but it’s not as high as people fear,” says Feldman. “At Bank of America, if the loan is for less than $417,000 and the borrower’s credit score is at least 680, I’m still doing loans that require only 3 percent down.”
But the number jumps considerably if the loan is for more than that amount, he says. “Up to $650,000 with a good credit score, you can probably get away with 5 percent down. But if it’s for more than $650,000, expect to put down 20 percent.” Feldman says the reason is simple. “If the bank has to ultimately foreclose on the property, it’ll have a much harder time selling a home that costs $650,000 than a home that costs $200,000.”
Maintaining a good credit score is one of the best things borrowers can do to remain good loan candidates. “Credit scores are more important than ever before. That number helps determine rate, what debt-to-income-ratios are acceptable and how much of a down payment is required,” he says.
Feldman cautions against two common mistakes. “The worst thing you can do is co-sign on a loan for a child or parent. I wouldn’t do it under any circumstance, because if that person is late on a payment or defaults in anyway, it hurts the credit score of the co-signer and may jeopardize their ability to get a mortgage loan.” And the other thing to avoid is credit checks. “Every time your credit is run, it’s a mark against your score. That is rarely explained to people, but if you’re signing up for store credit cards to get a discount, shopping for auto insurance or using balance transfer checks from your credit cards, your score is being run each time. Every time that happens, it lowers your score,” he says.
Qualifying credit score rules also have changed with the times, Feldman explains. “For mortgage loans we pull credit scores from all three credit bureaus for each person on the loan. Of the three scores, we used to throw out the high and low numbers and go with the middle score of the highest earner regardless of the co-borrower’s score,” he says. “But today, the rules are tougher. Now we go by the lowest credit score of the two borrowers when determining qualification.”
Drew Luning, VP of USA Mortgage, also reports that mortgage rates and loan qualification are now driven by credit score. “It seems to be what surprises clients most. What was considered an ‘excellent’ score six or nine months ago may now qualify as only a ‘good’ score,” he says. He’s observed that a score greater than 720 gets the best rate. “Beyond that, the rate inches up by a fraction of a percent as the score goes down, so it might be 1/8 of a percent higher for a score between 700 and 720, and 1/4 higher if the score is at least 680 and so on.”
Certain types of loans now have mandatory higher interest rates, he adds, in particular jumbo loans. “For a fixed-rate loan, interest rates on a jumbo are running at least a full percentage point higher than on a conforming loan (one for $417,000 or less).” To avoid the higher rates, borrowers needing more than $417,000 are taking out two separate mortgages. “They’ll do the first for $417,000 and the second for the remaining difference,” explains Luning.
Financing for investment properties also has taken a hit. “Rates for investment properties, those in rental pools, have gone up dramatically,” he says. “With all the foreclosures and speculators out there, banks are reluctant to service loans on properties that aren’t a primary residence.”
As is often the case, St. Louis is a better ‘mortgage market’ than many others, says Rich George, managing director and senior mortgage lending officer for The Private Bank. “We are a very conservative market, so we don’t see the skyrocketing values or deteriorating price swings like some areas of the country do,” he says. “Everyone is tightening the standards, but it’s still looser here than in many states.”
George cites California and Florida as two good examples. “I got word from Fannie Mae recently that they would not service loans on condos in Florida unless they can guarantee a 20 percent down payment. We probably won’t see that kind of blanket requirement here,” he says.
That being said, gone are the days of zero-down home loans. “Standard borrowers should expect to put 5 percent down, more if the loan is for jumbo. It depends on your credit score, too—the lower the score, the more you can expect to put down. But most of our clients still qualify for what they are looking for,” he adds.
Many adjustable rate loans clients are coming in for refinancing. “They are hearing that they need to finance right away if they think their adjustable rate loans are about to change, even if the fixed rate is higher than what they are paying now. I’m recommending clients wait out the adjustable rate (so long as the adjusted rate is less than what is being offered in a fixed product) in hopes that the fixed rate comes down in the coming months,” he says.
George looks at this mortgage climate as more realistic. “Americans were starting to become accustomed to the idea that owning a home was a right and not a privilege,” he concludes.