With housing prices finally increasing from the depths of recession that began in 2008, and the recovery in real estate seeming to gain legs and walk for a change, many people are asking the question as to whether 2013 is now the time to get back into the business of finding a home loan. However, the world of home-buying is not what it was prior to the big crash in the 2000s.
Tightening the Belt
First off, credit for home loans and mortgages isn’t flowing near as freely as it used to. After the recession hit, the federal government implemented a number of major changes to tighten up the mortgage approval process.
Second, banks immediately tightened up their own approval processes right after the recession hit, making it very hard to find a home loan for at least two years. Now, four years later, those approval standards have relaxed a bit, but consumers still have to go through a much harder application process than what existed prior to 2008. Many are going to find where they had been approved for loans years before, now they are being denied. It’s not the same world as before.
New Mortgage Criteria
Consumers can’t get too hung up with the criteria of one potential lender. In fact, mortgage lending criteria can vary from lender to lender, so it’s wise to shop around to see not only who will approve a loan for given consumer’s situation but also who offers the better deal with interest, points, and loan type. Granted, every lender has to follow certain parameters for home-lending, especially for loans that are underwritten by the federal government’s loan supporters, Fannie Mae and Freddie Mac. However, the guidelines and rules are fairly generic, allowing a lot of variation to occur between lenders. As a result, consumers who compare will be better served by more information and options than just focusing on one lender.
One area that lenders have created a higher hurdle on is a consumer’s credit score. Previously, if a consumer had a less than stellar score lenders just lumped on the points to a loan, making the applicant pay up front to get the loan. Today, if an applicant has a score below 650, the likelihood of receiving a loan from a major lender is very slim. In most cases, the applicant would be denied. To avoid even facing this sort of debilitating result, applicants need to review their credit score well ahead of applying for a mortgage. If the score comes out too low, then spending some time working on improving a credit history first will be worthwhile and improve a mortgage application later on. The one exception is FHA loans. In these cases the credit score isn’t so important since more focus is on employment, income level, reportable assets, and payment history.
Long Approval Process
Consumers expecting very quick loan approvals will now find themselves very disappointed by the current mortgage process today. Those who apply for a federal program mortgage such as loans offered through the Federal Housing Authority are now required to go through far more extensive screening and review than was done in the past. Under the modern criteria an FHA mortgage application can take up to 60 to approve and finish versus two or three weeks. Even regular mortgages from non-government lenders will take longer as banks and similar institutions are requiring heavy documentation of all loan factors such as employment, assets, financial history, credit history and more.
Lenders are also enforcing what are known as local loan limits far more aggressively now. These loan limits are the total amount of mortgage financing allowed in a given loan type for a specific region. Because the cost of living can vary by state and location, the number for a home in Texas will be different from that in New Jersey or Southern California. Homeowners in the majority of locations can’t be approved for traditional home loans greater than $217,050 for FHA loans. An exception is made for high cost locations up to a maximum of $729,750. That said a borrower in these areas can’t just walk into a lender and say, provide me a $500,000 mortgage. The greater amount provided can only be up to 125 percent of the area’s median home price, with a cap of $729,750.
Applicants should also expect to pay a down payment on a mortgage if approved. The days of practically free loans with no up-front cost are pretty much over. Now, a standard mortgage requirement expects a 10 percent down payment paid by the borrower towards a home purchase to ensure the borrower has “skin in the game.” For FHA loans, the down payment can be less, as low as 3.5 percent of the total purchase price. However, the down payment is still required. Where the applicant, however, has a credit score of less than 500, then the FHA loan process requires the higher 10 percent down payment.
It Isn't Easy Anymore!
Home loans are being made and with the rise in interest that is solidifying in new sales, home prices are now starting to finally appreciate after years of being in the tank since 2008. That's going to drive an increase in demand for mortgages and related financing. Banks and lenders are already expecting the increased activity, starting to raise their interest rates to capture the increased business profit. So the lending world is expecting the new business and request to come in, especially has people try to beat further mortgage rate increases from going higher. People can and will be approved for new mortgages, but consumers need to be prepared for tighter criteria. Doing one's homework ahead of time can prevent a lot of headaches and uncomfortable situations.