In today’s tighter lending environment, I’m consistently amazed at the number of buyers showing up to see my exclusive properties who have yet to speak with a lending institution or mortgage broker regarding their mortgage needs. I’m equally amazed at how many of these same buyers are completely unaware of how lending standards have changed as well as what options are still available to them in the current mortgage market. Here are just a few ways in which lending standards have changed:
- LTV (loan to value)/ Down payment Amounts: Although many are still qualified for 80 and even 90% financing, some who qualified for these products last year would be expected to put more money down enabling only 70% or even 60% financing.
- DTI (debt to income ratio): This is the ratio of your debt payments to your pre-tax income. Prior to the "credit crisis," there were stories of people with DTI as high as 87%…yes that’s right…87% of their income was going to service debt. That particular person had significant liquid assets but the DTI was extremely high. Now many banks (not all mind you, which is all the more reason to do your homework) subscribe to the 33/38 rule. Housing payments can’t be more than 33% of your pre-tax income and overall debt can’t be greater than 38% of pre-tax income. Again, many mortgage professionals still have access to loans with much higher DTI’s (ex. someone in our office had a client qualify with 60% DTI last week).
- Reserve Requirements: Every bank has different requirements for liquid assets post closing but almost ALL have increased those requirements. For example, some banks may require 6, 12, or 24 months of housing debt payments in the bank post closing while others may require as much as 25% of the loan amount in liquid assets.
These are just some examples of how lending standards have become more strict in the past year but this is by no means an illustration of the current environment for all buyers. Financing is indeed possible and the following may be surprising news to some:
- Savings Banks and Portfolio Lenders (loans to $3M): Unlike the major national banking institutions, these lenders aren’t dependent on a secondary mortgage market (they aren’t reselling your loan). Because of this, many of these banks are offering more competitive rates. So don’t simply rely on your current banking relationship…shop around and consider a mortgage specialist to help you do so.
- Jumbo Conforming Loans (loans between $417K and $729,050) and Conforming Loans (loans less than or equal to $417,000): Many buyers still qualify for loans of up to 90% in these 2 categories despite income and credit scores.
If you require a mortgage in order to purchase a home, follow that old Boy Scout motto and BE PREPARED:
- Before you go out looking at homes and get your heart set on that beauty you may visit, get a referral for an exceptional mortgage broker who has a knowledge of what is truly available in today’s lending environment..
- If it’s too late and you have already visited the home of your dreams, don’t settle for that single rate quote from your bank.
- Strongly consider a mortgage broker/banker who can run review your financial condition including credit history and provide you with ultra competitive rate quotes from multiple local savings banks and portfolio lenders.
You may indeed be pleasantly surprised by the mortgage products available to you in today’s market place.