New World of Mortgage Lending

mortgages going back to basics By Cathy Salustri

Three years ago it seemed anyone could get 100% financing on a half-million dollar home and lenders had a mortgage product for every situation. Today the lending pendulum has swung the other way and lenders are getting back to basics with more conventional mortgages.

Lenders say they’re protecting their interests and keeping their companies from going out of business by offering traditional mortgages. With most subprime lenders gone and many mortgage brokers changing careers or getting indicted, that caution makes the borrower feel better, too.

“We’re seeing home buyers, Realtors, and builders look for lenders they can trust,” says Tommy Saunders, a Wells Fargo regional sales manager in Charlotte, North Carolina. Many borrowers cried foul when the deal the lender brought to the closing table didn’t remotely resemble the one their broker promised. As a result many home buyers now choose lenders based on the company’s reputation and longevity rather than variety of mortgage programs.

Few lenders still offer “exotic” loan products such as sub-prime mortgages. Traditional lenders offer programs most reputable banks have offered for years, like the FHA loan and other conventional loans. Many still offer traditional ARMS—adjustable rate mortgages—and 15 and 30 year fixed-rate mortgages. Borrowers who qualify for these mortgages will find the requirements a bit more traditional.

Lenders now look for four chief things:

      1. Does the borrower have sufficient income to repay the mortgage? For an FHA loan the borrower can’t have debt that exceeds 44% of their income – that includes their new mortgage payment. The proposed payment (including taxes and insurance) alone cannot exceed 33% of income. Although many people assume the FHA loan has income limits, borrowers can make any amount of money and still get an FHA loan. Unlike some now-defunct mortgage products, lenders want to see income, tax returns or pay stubs.
      2. How high is the borrower’s credit score? Every loan program has different parameters, but basically the lender wants to see if the borrower pays their bills on time. Black marks like a past foreclosure might be OK depending on the program, how long ago it happened, and the borrower’s credit history since the foreclosure.
      3. Does the borrower have the down payment and how did they get it? Wells Fargo offers a maximum of 97% financing of the purchase price. Most major lenders require some money down on a mortgage, and they all want to see a “seasoned and sourced” down payment. The lender will verify where the down payment is coming from and they will want to see that the borrower has had that money for more than three months. Lenders want proof that the borrower can save money and hasn’t borrowed a down payment.
    4. What kind of collateral secures the mortgage? Basically lenders need to see that the home will appreciate rather than depreciate, which isn’t always possible in these days of the credit crunch. Some lenders are requiring two appraisals.

These are the same criteria banks used for years before the real estate boom. Conventional mortgages like these started when the FHA first started securing mortgages almost 80 years ago and these steps have stood the test of time.