Mortgage rates are low, but qualifying is difficult
Glenwood Springs, CO Colorado
Could it truly be the “best of times and the worst of times” when it comes to getting a mortgage loan? Maybe.
On one hand, interest on home loans hasn’t been this low since the early ’50s. But, on the other, it’s harder to qualify for a home loan since, well, maybe the ’50s also.
Gone are the gimmicky residential mortgages that made money so easy to get it seemed almost free. Gone the way of the passenger pigeon are stated income programs, low doc deals, no doc loans, and that crowning achievement of hedge fund heaven, the (drum roll) pay option ARM, where you got to choose your monthly payment.
The pendulum may not have swung quite so far back as Eisenhower, but we’ve definitely retreated to at least the Carter years when it comes to underwriting a home loan.
A debt service coverage ratio (DSR) is the traditional criterion for determining if a residential borrower could afford the proposed housing expense. What this means is that the monthly debt service, which includes principal and interest on the loan, real estate taxes, and hazard insurance (PITI) shouldn’t exceed a certain percentage of the borrower’s gross monthly income.
The so-called front ratio is the percentage of the PITI to the borrower’s income, and the “back ratio” is the percentage of all the borrower’s monthly debt payments including PITI, to income.
In the early ’60s the front ratio couldn’t exceed 20 percent of the borrower’s income, and the back ratio was at 25 percent. That is, if the borrower’s gross income was $800, then the PITI couldn’t be more than $160, and, to meet the 25 percent back ratio, the borrower could have another monthly payment of $40 for a total of $200.
By the mid ’70s, these ratios were up to 28 and 36 percent. As time passed, underwriters focused more on the back ratio, which inched up into the low 40s until it hovered around 50 percent for many mortgage products.
But then, around the turn of the last century, the world investment community’s insatiable hunger for mortgage-backed securities made ratios almost meaningless. By paying a bit extra in interest, a borrower with a fair credit score could get a home loan without showing any income or, alternatively, putting down a fictitious earnings figure that qualified. And, you could get a loan up to 100 percent of the value of the property.
One program was designated by one of those cute acronyms that mortgage mavens love: NINA, meaning no income, no asset verification. If your credit score was OK, you could be broke, out of work, and still qualify, with a little obfuscation.
The other day a mortgage broker mourned the passing of those recent good old days of mortgage lending, saying, “You didn’t need a laptop, just a thermometer. If the borrowers were warm, they qualified.” Income? You didn’t need no stinkin’ income. Well, it’s different now.
What can you expect if you decide to take advantage of the current tantalizingly low rates?
First, your income, job stability, and work history will be thoroughly verified. Loans are even being rejected if a borrower is in an industry or business that is perceived to be at recessionary risk.
Liquid assets will also be verified, and in some instances, not just their existence, but how they were acquired.
Self-employed borrowers must have a proven track record in their business or profession, and show a three year average of sufficient income to service all debt. To determine this, tax returns will be carefully scrutinized, with the borrower’s adjusted gross income, plus acceptable add backs, such as depreciation, being the determining factor for qualification.
You can get a loan in excess of 80 percent by virtue of FHA, VA, or with private mortgage insurance, but it’s no slam dunk. The mortgage insurance companies especially have tightened guidelines as they reel from defaulted loans they’ve insured. Since property values nationwide have dropped, dramatically so in some areas, lenders are leery of appraised values. Don’t be surprised if a second appraisal is required. Also, the lender might question the appraiser’s conclusion. This is especially so if there is a lack of comparable sales, a natural consequence of a slow or stagnant real estate market.
Approval of your loan may take longer than the last time you went through the process.
By all means, take advantage of today’s low mortgage rates. But keep in mind, the real world has raised its irritating head.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since his discharge from the Marine Corps in 1961. He was the president of Aspen Savings and Loan from its inception in 1973 until its sale in 1985. He was part of the founding group of Colorado Federal Savings Bank from its charter in 1990 and its president until 2006, when he became vice-chairman. Upon the bank’s sale in June of last year, he started his own consulting business. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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