Despite historically low home prices and rock-bottom mortgage rates, tight lending standards continue to keep would-be buyers on the sidelines. Higher credit-score requirements and more extensive income documentation requirements have also played a role in discouraging consumers from becoming homeowners.
"The mortgage climate has become a bit more challenging," says Erin Lantz, director of Zillow Mortgage Marketplace. "The lending community is fairly conservative right now."
But while mortgage financing is certainly no easier to come by these days, it's no harder, either. "Borrowers have a little bit of a misconception that you can't get mortgage financing," says Keith Gumbinger, vice president of mortgage information web site HSH.com. "The mentality of 'It's going to be too hard for me to get financing, so I'm not going to bother even looking,' is persistent."
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Credit standards stopped tightening about a year ago, Gumbinger says, and the most recent Senior Loan Officer Opinion Survey released by the Federal Reserve indicated that the residential mortgage market has essentially plateaued, meaning the lending climate hasn't become any tighter, but it's not getting any looser. "On net, standards on prime closed-end residential real estate loans and home equity lines of credit were about unchanged during the first quarter of 2011," the Fed press release said.
The prominence of government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac in the mortgage market has further complicated the picture. Gumbinger estimates that 90 percent of home loans are backed by Fannie, Freddie, or the Federal Housing Administration (FHA). There is virtually no private loan market to speak of. "Because Fannie and Freddie so dominate the marketplace, until they make a move or make a change to loosen, nothing is really going to change," Gumbinger says.
Mortgage financing may be the No. 1 worry on would-be home buyers' minds this spring, but there are steps house hunters can take to smooth the way. U.S. News talked to the experts to find out how borrowers can best navigate the tumultuous mortgage market:
Get your paperwork in order. In the wake of one of the worst recessions in U.S. history, one of the trickiest elements in securing a mortgage this season can be proving assets and continuity of income. Spooked by the foreclosure crisis still shaking out in the housing market, lenders are much more stringent when it comes to determining if a potential borrower can support the weight of a mortgage. "A couple of years ago, you could walk into any place and if you could breathe, you could get a mortgage," Gumbinger says. "Buyers have to align themselves much better with the new lending reality in lending standards. You have to be able to document your income and your assets fully—not all borrowers can do that, especially self-employed borrowers."
Self-employed individuals are allowed to write off certain amounts of income and business losses, which can create some issues when it comes to applying for a loan. "For self-employed borrowers, in their mind what they make versus what's supported by tax returns—especially when it comes to business expenses or losses—we see a lot of problems with that," says Chad Smith, senior vice president of mortgage services at LendingTree. "The beauty of being self-employed is that you are allowed to write off a lot of your income. However, that can seriously inhibit you from getting a mortgage." To avoid potential hiccups in the process, Smith recommends submitting two years of complete tax returns and asking the lender for pre-qualification as far in advance as possible.
But if your employment history over the past few years is spotty and you've had some financial difficulties, not all hope is lost. While there's not a lot of flexibility in the mortgage market these days, disclosing the details of your financial situation can work to your advantage. "That type of situation makes it more difficult to get a mortgage now than it would have a few years ago," Lantz says, but there are loan programs that have less restrictive guidelines. "Reach out to the lender and explain your particular financial situation and see what the lender can do," she adds.
Credit score is key. To get the best mortgage rates, you'll need a fairly high credit score, a FICO 740 or above. But even if you don't have the best of credit scores, you still have options. "A higher credit score can reduce the interest rate of a loan, but a lower score doesn't preclude you access to credit," Lantz says.
The FHA still offers an avenue for would-be home buyers with less-than-perfect credit, according to Lantz and other experts. Those who qualify for FHA loans have as little as a 3.5 percent down-payment requirement as opposed to upwards of 20 percent with conforming and nontraditional loans. But a break on the down payment doesn't come free; in addition to annual fees to participate in the program, FHA also has more stringent property quality requirements, a major consideration in a housing market bloated with foreclosed properties.
"We always see buyers run after what they think is a great deal, but they forget that the lender has standards they need to meet for that collateral," Smith says. "Buyers need to be prepared that if they're out buying a distressed property, which are a lot of the sales right now, and there are problems with the property, they may need to come in with a larger down payment."
It might seem like a no-brainer, but borrowers should know their credit score and make sure their credit report is accurate. Along with employment history and income documentation, credit reports are being scrutinized more than ever. Challenged or disputed accounts can throw a wrench into the qualification process. "If you have any disputed accounts, right, wrong, or indifferent, it's going to affect your ability to get financing," Smith says. "Even the smallest detail can derail something."
Be prepared to act. In today's market climate, things change fast. Mortgage rates can fluctuate by the day or even by the hour, says Lantz, which means when rates dip, consumers need to be ready to lock the rate in. "Most folks think mortgage rates are set once a day at 9 a.m., when in fact, they change throughout the day just like the stock market," Lantz says. Even a small dip in rates can have a meaningful impact over the life of the loan, she stresses. Whether you're looking to refinance or qualify for a new loan, preparation and education is essential. That means being ready with your financing, which in turn can help your credibility as a potential buyer.
"I would encourage consumers to start saving now," Lantz says. "It's not going to help the consumer that's interested in buying tomorrow, but the housing market is in a place where we can expect affordability for a while to come. It's a great time for prospective home buyers to start getting educated now about what type of mortgage they would like, what type of mortgage they qualify for, and what other obstacles they may need to overcome."