In the years following the housing market crash, the mortgage industry significantly tightened the criteria for homebuyers. Now, after being criticized for making the rules too strict, lenders are beginning to relax those standards a bit.
The latest proposed rule change, which affects the secondary mortgage market, could take those steps even further.
According to Mel Watt, who oversees Freddie Mac and Fannie Mae as the Director of the Federal Housing Finance Agency (FHFA), the two enterprises “are going to relax the payment history requirement for granting representation and warranty relief by allowing two delinquent payments in the first 36 months after acquisition.” The current rule does not allow any delinquencies.
While home loans originate in the primary mortgage market—which includes lenders who generate loans and borrowers who apply for them—changes in the secondary market—where mortgage-backed securities are bought and sold by three primary players (lenders, Fannie Mae and Freddie Mac plus investors)—typically trickle down.
As a result, lenders could lower their minimum credit score requirements or raise their debt to income limits even further.
In general, it has been shown that borrowers across the country must have a credit score of at least 600 and a debt-to-income ratio (DTI) of 43 percent to comply with the latest government rules and regulations. However, Ellie Mae’s latest mortgage origination report shows the average FICO score for FHA loans – which are backed by the government and attract buyers with lower credit in part because they allow down payments as low as 3.5 percent – was 686.
Here in Northwest Indiana, Ed Stojancevich, a Senior Mortgage Banker with A&M Mortgage Group in Merrillville typically looks for a credit score of 640 and can work with 620 in some cases.
“I would say things are definitely loosening up and will hopefully loosen up a little bit more. People need to be able move on from past mistakes when they were younger or going through a specific life event like a divorce or the loss of a job,” he said. “The bottom line is a score is just a score. It’s the Cliff Notes of the credit report, and there’s so much more to it. Debt-to-income ratios are also important as well as other details like prior collections, judgments and bankruptcies. It’s all on there, and it’s our job to take a close look at all of it.”
Stojancevich, who has been in the mortgage industry since 2006 and joined A&M Mortgage group 2012, noted his team collectively offers more than 300 years of mortgage experience.
“In this business you never stop learning,” he explained. “We encourage responsible homeownership and work with our clients, especially first time buyers, to educate them on the home buying process. For example, the fact that you are pre-approved for a certain amount does not mean you can realistically afford to make that payment every month. Buyers need to find their comfort zone financially speaking. This is especially important for the people in our area who are hourly workers. Depending on overtime to make your monthly payments is not something we recommend.”
Another important point that Stojancevich shares with all his clients – first-time or move up buyers – is the fact that they need a mortgage pre-approval before they start shopping for homes. In most cases, a real estate agent won’t even show houses to a buyer without a pre-approval.
“A lot of people don’t realize that pre-qualifying is completely different from pre-approval—pre-qualification is when the potential borrower has spoken with a lender about their ability to purchase a home, but has not gone through the underwriting process while pre-approval is when the potential borrower has provided the documentation necessary for an underwriter to verify that the borrower meets the loan program requirements. Then, the lender will typically only need to underwrite the property in order to obtain a final approval,” he said.
“With our automated in-house underwriting, our pre-approvals are pretty much gold – our real estate referral partners know they can count us to get the loan done when it comes time to buy, and that’s definitely important right now. Homes are selling quickly. Homes priced to sell do not last on the market very long at all.”
Another benefit to having a pre-approval in hand is faster underwriting when the time comes.
“One thing that differentiates us is that everything we do is in house – underwriting, processing and funding are all in house,” Stojancevich added. “Once we set the expectations up front with our realtor partners, we close files fairly quickly. We just had one complete in 10 days. For move up buyers who need the proceeds from the sale of their current home to purchase their next home, we can get that financing done for them so they can move on.”
With 41 percent of the homes sold in April on the market less than a month, according to the National Association of Home Builders, buyers must have their financing in place if they want sellers to even consider their offer. If buying a home is in your future, consider getting a mortgage preapproval sooner rather than later.
Something to think about – The Sarasota, FL Herald-Tribune reported last week that the longtime chief executive of BuyOwner.com has hired a professional Realtor® to sell his estate on St. Petersburg Beach.
Al Bennati, who built a successful business in Florida and Georgia helping people sell homes without a professional has listed his custom-built residence for $3.78 million with a Coldwell Banker agent.
“To sell a home of this magnitude, it needs to be done by a person and a company that reaches buyers of this caliber,” he said in a statement. “I was a spokesperson and co-owner of BuyOwner with my sister for over 20 years in Florida and Georgia. Selling upper-end homes like mine was never the market for BuyOwner.”
If an agent is the best person to represent a “home of this magnitude,” don’t you think a local agent would be the most cost effective way to reach the greatest number of potential buyers in the shortest amount of time at any price point?