Could gloomy popular assumptions about how tough it is to get approved for a
mortgage be scaring away large numbers of people who are qualified from even
applying?
Could the same worries — I can’t come up with the big down payment I
need, my credit scores are too low, my bank account has almost none of
the “reserves” lenders want to see — put a needless damper on a housing
recovery in the new year?
You bet. Lenders and economists will tell you flat out: The lack of accurate
information about the availability of loan programs that are designed to
address special needs is discouraging far too many consumers from even
considering an application, much less shopping around.
Mortgage banker Alex Stenback of the Residential Mortgage Group in
Minnetonka, Minn., said he sees it every day: “People just aren’t aware of
what’s possible right now” and as a result, they are missing real estate
prices and long-term interest rate opportunities they shouldn’t. Doug Lebda,
founder and CEO of LendingTree, the online site that allows banks to make
competing offers to applicants, believes that “the fear of being rejected”
because they don’t conform to standards that may not even exist, is keeping
qualified applicants on the sidelines for no reason.
For example, what’s needed for an acceptable down payment? Is it 20 percent?
Ten percent? Less? Yes, it’s less — and potentially a lot less if you
qualify for the right program. The widespread erroneous assumption that banks
require a minimum 20 percent for conventional loans may have arisen from
heavy media coverage this spring and summer of a controversial proposal by
federal agencies calling for borrowers to put down that much if they want to
get the best interest rates and lowest fees.
Also contributing to incorrect beliefs about down payments: The Obama
administration floated the idea of a phased-in move to 10 percent upfront
cash for all loans eligible for purchase by mortgage giants Fannie Mae and
Freddie Mac, who together dominate the conventional home-loan sector. But
neither the 20 percent nor the 10 percent plan has been adopted and the odds
of either moving forward in 2012 are remote. Fannie Mae’s and Freddie Mac’s
standard minimums are still 5 percent with mandatory mortgage insurance
coverage.
If you have little or no cash to put down, there are multiple options for
you: FHA requires just 3.5 percent down on its insured mortgages. Other
programs let you go to zero — even finance more than the price on the
house when fees are rolled into the mortgage — provided you fit into an
eligibility niche. If you qualify as a veteran or active member of the
military, you can get a zero-down VA-guaranteed mortgage. Plus the VA allows
your seller to pay your loan fees and closing costs provided they don’t
exceed 6 percent of the house price.
You can also buy with nothing down if you are purchasing a home in any of
the many communities around the country that are eligible for rural (USDA)
guaranteed mortgages. Though the property may be located on the outskirts of
a large metropolitan area and might not strike you as particularly “rural,”
if the local population is below roughly 20,000, there’s a decent chance
you’re eligible. The little-publicized USDA guaranteed home loan program,
by the way, is booming. In the last fiscal year alone, according to housing
administrator Tammye Trevino, more than 130,000 borrowers received low or no
down payment guaranteed mortgages — quadruple the number of loans extended
as recently as 2006.
What about credit? Haven’t lenders been pushing up minimum FICO scores
into the mid-700s and rejecting applications with lower scores outright?
Not everywhere. Though most lenders doing FHA loans require 620 to 640
scores to get you in the door, a few of the biggest FHA originators, such as
Quicken Loans, will accept scores down to 580. Bob Walters, Quicken’s chief
economist, said underwriters scrutinize low FICO applications extra carefully
but are seeing good to excellent performance from them: Not one has gone
seriously delinquent this year.
And how about debt-to-income ratios? Aren’t they tighter than ever? Not
really. Lenders say that when loan applications go through the “automated
underwriting” systems used by Fannie, Freddie and FHA, borrowers with high
total monthly debt levels of 45 percent to 55 percent of household income
— well beyond the posted limits — frequently get approved if they have
positive compensating information elsewhere in the application.
Bottom line: Don’t assume you can’t qualify for a mortgage in 2012. Talk to
lenders and seek out loan products that offer flexibility where you need it.
You just might be surprised.
Ken Harney is a syndicated real estate columnist.