The Aftermath Of The Housing Bubble

In the early 2000’s, mortgages were very easy to obtain, almost too easy in many cases, and this is one factor that ultimately lead to the bursting of the housing bubble.  Five or ten years ago, high risk borrowers could potentially obtain loans with minimal down payments and less than perfect credit, and while these loans were helpful at first, all it took was one or two missed payments to start a downward spiral, eventually leading to foreclosure.

In today’s lending world, however, there has been a complete turnaround when it comes to qualifying potential borrowers, such a big turnaround, in fact, that many hopeful borrowers are completely surprised by the rigorous application process that now goes along with obtaining a mortgage, due to new Federal regulations that lenders must stand by.

Here are a few roadblocks you may come across when applying for a mortgage in today’s post housing crisis world, and some tips on what you can do to ensure approval.

Down Payments

While qualifying for a loan without a down payment is still possible in certain cases, it is definitely not the norm anymore.  If you are looking to obtain a loan with a low or no down payment, there are a few options.  There are a few loan programs that are backed by the Dept. of Veterans Affairs that allow qualified borrowers that meet specific guidelines the option for a loan with no down payment, and FHA loans are still allowing for low down payments.  However, FHA loans used to allow for down payments of 3 percent or less, and now the minimum percentage has moved up to 3.5.

Debt-to-Income Ratio

Five to ten years ago, many families could qualify for a mortgage with a 60 or 70 percent dent-to-income ratio.  In today’s world, the standard is approximately 43 percent.  There are various factors that contribute to this that include the current economy and job market, and lenders simply do not want to take the risk that borrowers will be using their funds to take care of additional debt instead of paying their mortgage on time.  Additionally, today’s lenders will investigate further when it comes to borrower’s employment.  They will inquire about overtime as well as length of employment in order to get a true picture of what a borrower can afford, and this can definitely be a roadblock to those who have recently started working again after a lengthy bout of unemployment.

Proper Documentation

If you are hoping to obtain an affordable mortgage loan, you will want to make sure you have all the proper documentation in order before starting the application process.  Documentation you will need includes bank statements, tax returns, and social security information.  Lenders have an obligation to thoroughly review these documents as well as compare notes with the IRS, so it is important to have all your ducks in a row before getting started. It is also important to note that when the lenders compare bank statements to income statements, they will expect a full explanation of any extra money that is not coming directly from an employment check, so it is always a good idea to keep your receipts, especially if you do contract work in addition to your regular job.

Credit Score Requirements

At one point in time, a mortgage could easily be obtained with a credit score of 580 or higher.  Today’s rules typically require at least a 620 score, and that is on the low end.  The average credit score that is preferred now is between 720 and 765.  If your credit score is currently on the low end, you may wish to hold off on applying for a mortgage until some of your debt is paid off and you have increased your score.  Not only will this better your chances of qualifying, it will also help eliminate excess monthly debt that you can put toward your mortgage payments.

New Mortgage Lending Standards

While today’s mortgage application process can be a bit frustrating for potential borrowers, the reality is that something had to be done in the wake of the economic collapse and housing crisis.  Not only were risky borrowers defaulting on their mortgages, hard working individuals were losing their jobs and ending up in default as well.

With the newer standards, there is definitely hope for more stability in the mortgage market.  Potential borrowers now need to take a realistic look at their finances and overall ability to pay, and lenders are cracking down in order to keep the market in check.  While the detailed application and approval process may annoy seasoned borrowers, borrowers that are new to the home buying process will definitely benefit from the changes.

A high credit score and verifiable income assures lenders that these mortgages will not go into default, and potential home buyers will be able to obtain mortgages with confidence and the peace of mind that they can realistically cover their payments each month, allowing for a win-win situation for both lender and borrower.

Fannie Mae and Freddie Mac Joining Forces

Fannie Mae and Freddie Mac have made plans to merge together in an effort to increase securitizing practices on home loans, which in turn will allow for less government involvement in the overall mortgage market.

Since the bailout of both agencies in 2008, they have currently utilized approximately $190 billion in government money in order to continue doing business.  By increasing their securitization efforts through a single company, the two companies will have more control over the mortgage credit industry, and will be able to continue with assisting eligible borrowers in obtaining affordable home loans.

Intentions For The Merger

While the two companies do not actually make the loans, they are responsible for purchasing mortgages and then in turn providing the proper financing to lending institutions in order for the mortgages to be approved. One of the intentions for the merger is shrinking the business by 10 percent in the lending market, a move that will greatly minimize both Fannie Mae and Freddie Mac’s overall roles in the housing finance system. With the two companies merged together, the FHFA believes that taxpayers that currently support these two powerhouses in the mortgage world will lower their overall tax risks, and that working from a single securitization platform will benefit everyone in the long run.

Largest Insurer of Mortgages

FHA is the largest insurer of mortgages in the entire world, and in today’s housing market and economy, more and more potential borrowers are taking the route of applying for government backed loans.  The Federal Housing Administration’s main goal is to assist borrowers in obtaining a home loan, even if they have less than perfect credit.  With the overabundance of foreclosures in the past few years coupled with job losses and a uncertain economy, the need for FHA loans continues to grow.

Fannie Mae and Freddie Mac are partially funded by the government and regulate the conforming loan market, making them two very powerful entities in the housing world.  Additionally, they both offer various programs that are specifically designed for potential borrowers with low to medium credit and past credit problems, allowing risky borrowers a chance at obtaining a home loan that many not have been possible through a standard lending institution.

New Business Venture

While the new business venture is not expected to officially start with the securitization of home loans until 2014, the business plans are underway and the new company is in the process of hiring staff.

Will this new venture work?  Only time will tell.  With the housing market slowly improving, there are definitely a new crop of interested borrowers that are in need of mortgage loans, and considering the fact that these two mortgage giants have each had their own share of success, a productive merger is definitely a possibility.   The main objective of the merger is to produce a product that can be sold or utilized by policy makers today, and that will have a positive effect on tomorrow’s mortgage market, and a single securitization platform may just be the key to a successful future.