When my husband and I relocated to Indiana last summer, we went through the grueling process of selling our house in Ohio and buying a new one in our new town. In addition to the stress of packing, moving and preparing our beloved old house for sale, we were incredibly surprised by the number of hoops our mortgage lender made us jump through in order to purchase our new house—which was a great deal less expensive than our former abode. Considering the fact that my husband purchased our Ohio house in 2005, when banks were basically giving money away, some of the stricter standards we saw in 2010 seemed reasonable. (The pint of blood needed at closing did not). But what exactly can you expect if you are applying for a mortgage in the post-housing crisis market? Here are a few of the more stringent standards:
1. Borrowers must have better credit. In 2009, it was decided that the minimum credit score for taking on a mortgage should be 620, rather than the 580 required prior to the sub-prime market implosion. If your credit score is below that threshold, you will want to work on improving it before you look into home ownership.
2. Borrowers must have a lower debt-to-income ratio. It used to be that you could qualify for a mortgage with debt payments equal to 55% of your income. Now, the maximum percentage is 45%. So even if you find a home that will be able to grow into, you may not be able to get the financing for it.
3. Borrowers can’t have any missed credit card payments. Before the housing crash, a missed payment or two on your auto loan, credit card or student loan didn’t make a difference if you were an otherwise qualified candidate. Now, banks will factor in 5% of the outstanding balance into your debt-to-income ratio, possibly disqualifying home loan. If you are looking into home ownership in the near future, make sure that you stay on top of your loan payments.
4. Borrowers have to wait longer after cleaning up from a foreclosure. Anyone can make a mistake, and it used to be that showing five years of good financial decisions after losing a home to foreclosure was enough for you to qualify for a new mortgage. These days, you will have to show seven years of financial well being before you are allowed to borrow. The only benefit to the required two years is that it could theoretically give a home buyer more time to save for the down payment.
Amazingly, one quarter of all potential home buyers are rejected for mortgages. While it is important that we do not have a repeat of our housing crisis, it is unfortunate that the banking industry seems to be throwing the baby out with the bathwater.
{ read the comments below or add one }
This isn’t true. I’ve known several people who have purchased houses 2 years after a foreclosure or bankruptcy. And, those were recent purchases, not years ago before the “new rules.” And, one even purchased a new home with $0 down – just like it was before.
We have had flawless credit for years, almost as much cash in the bank as we wanted to borrow, even more in retirement accounts, high-income for both spouses, mutli-decade steady employment, and a house with three times the appraised value as the loan amount. And we got dinged because of a $5 credit card payment that was a day late because of some stupid glitch. We were the ideal candidates for lending to, but it took almost half a year for the loan to close. The industry has self-destructed. Now they don’t want to do loans. They want to make all their money from credit card fees and high-interest cards given out to bad credit risks. And who gets their rate lowered? People who are defaulting. Stupid. This is what we get for financing their bailouts with tax dollars.
P.S. And this was just a refinance! Ridiculous.
I am in a very unique situation. Our home was damaged due to a hurricane in that we developed a sink hole and then within a week the opposite side fell. In our area of the world sink hole experience was not offered to us we did not even know it existed. So you might say we have no insurance, the home has been deemed unliveable and we have not received any help from FEMA or any local agencies. We are living in a relatives farm house that is for sale and I have continued to pay the mortgage because I don’t want to foreclose. We are trying to gain help from somewhere, because if we foreclose it is of no fault of our own. We have never been late with a payment and have good credit but we may be forced to do this anyway. I have heard that you can have a disclaimer added to your credit rating as to why foreclosure became the only way out.
Robert-
You can purchase that home easily, and still have funds to save and live well.
Your debt to income ratio is 1.3 to one on a $35k mortgage (5k down on 40k purchase).
In fact, a mortgage payment should never exceed 1.5% of your monthly pre-tax income, to be really be affordable
Your monthly payment is about $350 on $2200 income.
Don’t try to buy a 400k home though, as casino and landscape workers earning your salary did during the Las Vegas housing boom in 2006-07.
Those homes are now growing weeds in the back yard, and abandoned.
An ancient king of a nation who also had citizens desiring to live beyond their means said it best about loans that are unaffordable to what you earn:
“The borrower is always slave to the lender”-Proverbs.
Loans are not the problem in our easy credit charge up front society wanting to live the American Dream.
Unaffordable loans are.
By the way, don’t move to China if you want to buy a house easy. They require up to 50% down payment before purchasing a home or apartment.
And, their economy is growing right now at 7%. Ours?
1.8%.
A question for those more experienced:
$26k/year
760 fico
0 debt
$5000 to put down
I’m looking at a few houses in my area for about $40,000. Is it likely that I will be approved? I have no w2’s for last year. Just started working a month ago. I may also have my father co-sign.
Robert you’re a good example of how the new/old* regs don’t tell the whole story. First off, if you’re talking about a 35K loan at today’s rates, that’s essentially an auto loan. Your Debt to Income shows you should be able to afford this, but your work history might prevent you from getting a loan, or getting one at the best interest rate possible. However, with as low as they are today, even if you pay a quarter or even a half percent higher, it’s not going to be a huge deal for you.
FYI – the regs were once tight. They got loosened during the boom. And then they got tighted again, beyond pre-boom terms.
A work colleague is retiring to FL, selling her condo in NJ. The bank where she is trying to get a mortgage, one of the major US banks, is being obtuse. Although she is putting down about 30%, the bank is being tough because their appraisal is a few thousand less than the selling price. The bank is asking for the same documents repeatedly, asking for info that cannot possibly make a difference. For example, part of the down payment came from the closing out a retirement account. Now the bank wants the 40 page document outlining the procedure whereby the insureance company managing the retirement fund makes the payment.
Not to be cynical, but, if our government hadn’t created the situation by allowing banks to literally give money away without making people who wanted to own a home provide the necessary documentation to prove that they could afford it, the housing bubble would not have burst. Canada had it figured out and their banks and their housing values have done well because of it. When you apply for loans involving thousands and sometimes hundreds of thousands of dollars, you should have to go through the mill, so to speak. Allowing people to speculate on residential real estate obviously doesn’t work in the long run. Owning a home is not a right, it’s something you earn by your efforts and going through the hoops is just a necessary part of due diligence.
We relocated a year ago and had no problem getting a mortgage commitment. The follow-up paperwork was onerous to say the least. The mortgage company required reams of paper – pay stubs going back more than a year, account statements from credit cards, investments, etc. The request for additional information went on for weeks. Then two days before closing they requested a lot of the same information again. I totally understand the need to ensure people can afford their mortgage, but the process was frustrating and time-consuming. I think one of the problems is what many comments have touched on – peoople do not realize the real costs of owning a home. The mortgage is just the beginning…
I’m curious to see how many more people will buy beyond their means again. I’m glad to see that the banks are finally increasing their standards and having a better grip on the real estate market. I am especially happy to see them lower the debt payments vs. income to 45%. I think they could have dropped it even more to 40% like it is in Canada. This will ensure a better quality of life for everyone as they will have more money to spend on entertainment or on paying the home down faster if they wish to do so.
@Bob C, I do agree with you that The American Dream with White Picket Fence can really lead some homebuyers astray. For me, buying a house is about making a home. When we sold our home in Ohio, we lost quite a bit of the money we had put into the house as renovations, but neither of us have any regrets. We renovated the house because we wanted to live in it with these changes, and then our life changed and we had to sell. When people are sold the idea of home ownership as a means to riches, it leads to a lot of iffy decisions. Both of the homes that my husband and I have owned were places that we loved, could more than afford, and could see ourselves living in for a long time. I’d love to see more young buyers using similar criteria for buying a home.
I don’t like the increased standards, but it is necessary. Part of the reason we’re all collectively stuck in this real estate/mortgage mess is because it was too easy to get a loan, and banks were lending money to people to purchase homes they could not afford. The slang for these types of mortgage was called “Ninja” loans. No Income – No Job – No Assets. Lending standards are not higher today to punish people. Instead, they’re at a level they should always have been.
I recently got approved for a mortgage (although I ended up not buying), and considering I only had my job for 6 months at that point, I thought I was approved for a purchase price FAR beyond what I could afford. Even with tighter regulations, I think banks are still willing to let people bite off way more than they can chew…
what if my credit isnt that great
right now, i’m looking at re-balancing my mortgage portfolio…. i hope that my repayment records for the last few years have been satisfactory and thus i can hopefully come out with a better deal that what I have right now…. thanks for your tips.. a timely reminder that’s for sure..
I had no idea about the 55%/45% percentages, I know how leveraged you were figured into things but I didn’t realize it was a hard and fast number.
With any luck, I’ll be going through this process soon. As far as the four criteria mentioned in this post, we should be golden, but I’m still anxious. Thanks for the heads up.
Right on Pamela. One quarter of the people I know who bought houses couldnt actually afford them and regretted it within a year or two.
I think Pamela has a good point. I would also add that I think in pursuit of the interests of bankers and the “ownership society”, we really distorted the value of home ownership. There are many people who really have no business being approved for a loan or even trying to buy a house in general. And there’s nothing really wrong with that. Home ownership doesn’t always make sense. While I like the idea of having my own home/property ( though I would argue you never really own it outright since you pay taxes for eternity), I am typing this from my own Ohio home, purchased in 2001 ( built in 1996), that is worth less than it was when I bought it. Additionally, I’ve probably spent the purchase price in necessary repairs/maintenance over the years. More things need fixed but I don’t have the money. I know a lot of people look at renting as “throwing your money away,” but consider this: I’ve spent around $120,000 on mortgage payments. The principle owed has only decreased $13-14,000 or so. Had to buy or replace: roof, fence, flooring/carpeting throughout, water heater, furnace, a/c unit, garage door/opener, sink, faucet disposal, repair electrical/plumbing, other appliances,etc. I don’t think I could sell the house for what is owed when considering fees and necessary improvements to entice buyers,etc. If I spent the same payment on rent, I would probably have a nicer place, and be able to move with no issues and no loss. I DO plan on living here another 30-40 years, and that is where I might just break even.
My objection is that certain income is not counted. I bought a duplex and in 1.5 years I have only not had a renter for 2 months, which included fixing up the apartment. Yet, I cannot use that income or the income from any rental I buy as income until I have had the duplex for 2 years. Yet, 2 years from now both the current duplex and any rental I buy would count. I think jumping from counting none of the income to everything is silly. I also dislike that I have to have 25% for rental even if I would rather not. I think 20% should be the max required, rental or owner occupied.
I’m sorry you had a frustrating experience getting your latest mortgage. But I humbly disagree that the “new” standards you cited are an example of “throwing the baby out with the bathwater.”
Your post is talking about good, basic underwriting. And as someone who works everyday with low income families and counsels folks with poor credit, I still think they’re very reasonable.
The communities that avoided the foreclosure crisis are those whose lenders stuck to good underwriting and didn’t try to profit at the expense of homebuyers who couldn’t afford or understand some of the crazy products they were being offered.