Tuesday, May 19, 2009

Why is it so Difficult to get a Home Loan?

It seems like every day someone is asking about why it is so hard to get a real estate loan. Just two years ago anyone, and I mean anyone, could get a loan to buy a house or condo. Well, the times have changed and rules from the lenders have changed right along with the times. For now we will not explore the cause of this change, only the new requirements. Keep in mind though that these will change over time as well, hopefully to a more moderated middle ground but only time will tell.

For those looking to get qualified in this tough market, please note the criteria below:

Fico Scores. These must be better than average (600+), and when the credit report is run there must be no Bankruptcy (BK), and likely no "collections" of accounts will be allowed.

Down Payments. Buyers must have some money to put down, no longer will the lenders approve 100% financing, most likely the lenders will require 10-20% down (except FHA which allows only 3% (3.5% in 2009)).
Ample Income. All income will need to be verified with pay stubs two year period and IRS and State tax filings for 2-3 years. Then they will calculate your debt-to-income ratios (looking to see that you can really make the payments). Each lender has different ratios they will pass or disqualify with. As a general rule, these days they are wanting to see much smaller debt-to-income ratios. In other words, the banks want to see borrowers with more income and less outstanding debt obligations.
Stated Income. This (with no verification) is no longer available, meaning quite a hardship on the self-employed, but lenders are very risk averse now. The only exception is if buyers have a very hefty down payment like over 30%.

Proof of Funds. A few months worth of recent bank account statements will be required to show that money is really available for closing costs and down payments.

Reserve Funds. Many lenders require that the borrower have reserve cash on hand to cover two to six months worth of payments.

Non-Occupants. If the property is not going to be the home of the borrower (like a rental) then most lenders will increase the interest rate on the loan.

Limited Holdings. Restrictions are also placed on many borrower that this property will not increase their rental holdings to more than 4 units. Lenders are very suspect of investors that might be over leveraging themselves.
Obviously, only very qualified people can meet the above criteria, and that is just what the lenders want in a time of uncertainty and massive losses. For the time being they can’t justify making any more high-risk loans. Hopefully, knowing what is needed in advance to get approved, buyers will understand that it is critical to prepare early and get their ducks in a row before starting the home buying process. For those lucky enough to be qualified in today’s market, a wide range of opportunity awaits them.
Source: Realty Times, Written by Bob Foust

Bill Whitescarver
Broker Associate
Chinowth & Cohen Realtors
Cell: 918-691-7653

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