Yesterday, a fairly sophisticated home buyer called me about a pre-approval. He and his wife own a home, and a vacation home. This is a successful business couple who are doing well in the residential construction market despite the current economy. He indicated that they wanted to buy a new primary residence. His question to me was “We can get together about 10% down. Can we even buy a new home with less than 20% down?”
It’s no wonder they are confused. Every other article where leadership of the National Association of Realtors is quoted, every press release they issue usually has the quote that “tight lender guidelines are hurting the real estate market” or “buyers need to have 20% down and be perfect to accomplish a purchase” or some words like that.
Unfortunately, these types of statements are blatantly untrue in most markets, and are very damaging to the real estate market at large and to home buyers and sellers everywhere.
It’s true that lenders are giving loan applications MUCH greater scrutiny than they have in any time since 1998. Rampant mortgage fraud on the part of borrowers, Realtors, lenders, and mortgage originators have required lenders to check and recheck everything represented in a loan application. Unfortunatley, until we get everyone to realize that the “silly bank rules” they are breaking consititutes a federal crime we are stuck with the extra scrutiny. Fortunately, the new national loan originator licensing and registration systems should make loan officers everywhere realize the seriousness of this issue and root out fraud before it get’s to the point of a loan being funded. The safety of our banking and financial systems is too important to allow the kinds of games that have been played over the last few years.
The National Association of Realtors is right about appraisals. Appraisals remain a very serious issue. Pressure from Fannie Mae and Freddie Mac on lenders results in pressures by lending institutions on appraisers to bring in appraisals very conservatively. It’s common for appraisers to use inappropriate appraisal practice due to the Fannie Mae/Freddie Mac form1004mc, which results in innacurate appraisal (see previous posts).
It’s also true that underwriting guidelines are stricter than they were during the golden age of loose underwriting (1998 thru 2008). What people don’t realize that underwriting guidelines are easier now than they’ve been in any previous time frame. In fact, it’s a great time to buy for many folks who have been priced out of markets previously.
How can I make that type of claim? Because I remember the “bad old days”…..Prior to 1997-1998, debt-to-income ratio’s were much stricter than they are now. A debt-to-income ratio compares your total debt to your total income. In the old days, if you put 5% down on a conventional loan, you couldn’t have more than 36% of your total income go towards your debt. Now? If you’ve been reasonably careful with your credit, have decent job stability, and a little savings left over for emergency it’s pretty easy to get to a ratio of 41%! With only 5% down! On FHA loans, it’s really easy to go to 45% DTI with only 3.5% down! In fact, there are times that we go even higher.
Is that obvious in the mass media? No. They paint a dire picture based, in part, on the statements of NAR.
So, if you are a Realtor, press NAR to paint a more positve picture of financing. Nothing that is “puffed up”, just reality. If you are a buyer, don’t be fooled by what you read in the mainstream press. Talk to a good, local, independent mortgage banker. They’ll give you a clear path to home ownership and join the ranks of homeowners!