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Loans harder to come by but not beyond reach
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It is certainly no secret that lenders have tightened some of the qualifying parameters for mortgage loans. However, there are some misconceptions with regards to the availability of lending and what lenders are doing to make sure qualified borrowers still can find a way to finance the home of their choice.
I would like to discuss how the market itself and individual lenders have changed or eliminated loan programs and guidelines to help reduce default rates and ensure accurate loan pricing for all borrowers. I also will try to point out some of the positive effects these changes have had on borrowers and the market as a whole.
Let's start by looking at the three most significant changes that have occurred from a loan availability perspective. First, some lenders and types of loans have been eliminated or their availability has significantly been reduced. Second, some programs have been modified with regards to their minimum credit and down payment requirements. Finally, there is more rigid enforcement of some lending rules that have been in place all along.
I think the most obvious example of loan programs that have significantly been curtailed are sub-prime loans. There is no widely accepted definition of a sub-prime loan, but the common perception is that these loans were made to borrowers with impaired credit and possibly other issues that prevented the borrower from securing an A-paper mortgage loan. Sub-prime loans normally carried a higher interest rate than comparable loans made to borrowers with clean credit.
The intent of this higher interest rate was to compensate the lender for bearing the greater default risk associated with sub-prime lending. Unfortunately, this risk was widely underestimated by the market as a whole.
However, it is important to note that there still are options for borrowers who have had credit issues. Federal Housing Administration-insured mortgages do not have minimum credit scores provided the borrower has been rebuilding his or her credit and has been making timely payments during the previous two years. There has been a significant increase in FHA mortgage origination in the past year as the gap created by the elimination of some sub-prime lending is filled.
Nearly every existing loan program has been modified during the past eighteen months or so. In most cases this has meant that the maximum loan to value has been reduced, the minimum credit score has been increased or a combination of the two. While there has been some reduction in lending as a result, the intent of these program modifications is not to restrict or curtail lending, it is simply to encourage borrowers to seek out loan programs that are more in line with their budgets.
In the long run, helping make sure borrowers are in loans they can afford will be beneficial to the real estate market.
Finally, there has been an increased focus on some lending guidelines. One example of this is the area of property occupancy. For a lender to accurately price a loan, he or she must know the borrowers intent for the property. Primary homes, vacation homes and investment properties all are priced and underwritten differently. Lenders always have relied on the borrower to accurately declare his or her intent for property occupancy and we still do. However, there have been additional checks and balances put in place to make sure the stated occupancy makes sense given the individual scenario. Going forward this will mean that more loans are priced accurately, which will help lenders make correct lending decisions.
While the mortgage lending environment certainly has changed, there still are numerous options available for homebuyers. If you have any questions, or would like to find out how your specific situation fits into today's market, please contact a member of the Mortgage Lenders Association of Greater Hilton Head Island.
Ric Spiehs is vice president, mortgage branch manager, of Bank of America on Hilton Head Island and president of the Greater Hilton Head Island Mortgage Lenders Association.
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