June 4, 2008
GETTING a mortgage used to be as easy as choosing the right color paint for a new home. Don’t have stellar credit? No problem. No verified income? Step right over here. High debt-to-income ratio? Sign on the dotted line anyway.
“Two years ago, we had a meeting where a mortgage broker said, ‘If you have pulse, I can get you a mortgage.’ ” said Klara Madlin, the president of the Manhattan Association of Realtors and owner of Klara Madlin Real Estate. “And I thought, ‘We’re in trouble.’ ”
Most people have heard about foreclosures’ becoming more common because borrowers cannot pay the escalating rates on their mortgages. But what about those looking to get a mortgage now, either as a first-time buyer or someone hoping to sell a place and move on? What challenges face them?
“There is a new prudence in mortgage lending,” said Keith Gumbinger, a vice president of HSH Associates, a mortgage research company in Pompton Plains, N.J. Mortgage lenders, he said, are “interested in traditional mortgage buyers who will document their income and assets and don’t have sizable debts relative to their income.”
Potential buyers can no longer waltz in with 5 percent or even 10 percent down. Most banks are asking for 15 to 20 percent, or even more.
“As I like to say, 80 is the new 90,” said Melissa Cohn, the president of the Manhattan Mortgage Company, referring to the maximum amount lenders will now finance. And if you have any financial issues that lenders might see posing a risk, “it’s much harder to get an exception.”
Mortgage lenders willing to hand out a loan with competitive rates are taking a much closer look at several factors:
CREDIT SCORES A borrower’s credit score — also known as the FICO score, which was created by the Fair Isaac Corporation in the mid-1990s — is a chief determinant of eligibility for loans. Most applicants now need a score no lower than 660, and in some cases lenders are not willing to go below 720.
DEBT-TO-INCOME RATIO This is the percentage of a borrower’s income that goes toward paying debt. Lenders calculate it two ways. There is the front-end ratio, which includes housing costs like the mortgage principal and interest, mortgage insurance premium, if applicable, and property taxes. The back-end ratio includes any other debts like car or student loans, credit cards and alimony. Mortgage companies used to take applicants with debt-to-income ratios as high as 55 percent, brokers say; now the maximum is in the mid-40s. By the way, a borrower’s credit card limit counts as actual debt, regardless of whether the card is even used.
DOCUMENTING INCOME Most lenders are no longer willing to settle for stated income, without document verification, preferring instead that applicants provide all the necessary paperwork to prove income. So-called no-doc loans — often used by seasonal or self-employed workers who have a harder time proving their income — have also been called “liar loans,” because some borrowers have been known to exaggerate their earnings.
LIQUIDITY Banks require that borrowers have a certain amount of money readily available — equal to 3 months to 36 months of payments, depending on the lender, according to Ms. Cohn — to cover mortgage and insurance.
Before, these stipulations were not as onerous. “You were allowed to have multiple layers of risk, and still get a mortgage,” Mr. Gumbinger said, referring to what lenders consider as negatives, like low down payments or credit scores. “Now you might be allowed one risk.”
Val Kleyman, a self-employed lawyer from Staten Island, knows this firsthand. He bought a two-bedroom town house three years ago; his wife then had their first child and wanted to move on to a bigger place in the same borough. He had put down 20 percent on the town house and made payments on his adjustable-rate mortgage diligently on the first of each month.
Mr. Kleyman would seem to be the perfect customer for another mortgage from his same lender.
“I called the bank, saying I wanted a mortgage for a bigger house,” he said. “They said: ‘That’s very nice. You always pay on time, but we can’t give you a mortgage.’ ”
Actually, the bank would give him a mortgage, but only with a 25 percent down payment. As he had with the town house, Mr. Kleyman wanted to give his lender a stated income — with no supporting documentation — rather than a verifiable income.
He plans to hold onto his first house and rent it out, and that would count as debt against him. He is also self-employed.
In the past, Mr. Kleyman found that getting a mortgage with a stated income was not an obstacle; he might have had to pay a slightly higher premium, but that didn’t bother him. He could afford to pay 20 percent down, but an extra 5 percent is a stumbling block.
Mr. Kleyman has looked at other lenders, and some of them want as much as 30 percent down. Now he will either have to bring in his father or another relative as a co-borrower or scrape up the extra cash for the down payment.
While it’s hard enough for people wanting to buy existing homes to come up with the extra down payment, new-home buyers have their own set of problems.
Ms. Cohn of Manhattan Mortgages says that about a quarter of her clients put down deposits on new construction a while back, before the homes were completed. Now that they have been, some would-be buyers are being required to put down an extra 10 percent. “They got preapproved for 90 percent,” she said, “but half those banks don’t exist anymore, and even if they do, the preapprovals have elapsed.”
One client in Manhattan signed a contract for a $6.5 million apartment, but when the time came to close, he could not find the additional down payment that the bank required. “He had to trade down for a smaller apartment, and bought one for $3.5 million,” Ms. Cohn said.
Alexandra Nicholson, a communications manager, had a similarly challenging experience as a new-home buyer. Ms. Nicholson thought she was all set last year when she signed a contract for a condominium in a building under construction in the Washington area.
She was promised an 80-15-5 loan, meaning she would get a main mortgage of 80 percent of the home’s purchase price and a piggyback loan for 15 percent at a slightly higher interest rate, then make a 5 percent down payment herself. With none of the industry’s risk factors and fully employed, she would have been a shoo-in until recently.
In April, her mortgage broker suddenly informed her that he could give her the mortgage only if the condominium had 51 percent or more occupancy.
“I called six lenders in two days,” Ms. Nicholson said. “No one would finance me.”
So she pulled out of that deal and is now looking for another place. But in the meantime, her 80-15-5 mortgage deal disappeared, and now no one is willing to resurrect it. She can still put 5 percent down, but will be required to buy mortgage insurance, which will cost an extra $100 to $140 a month.
“I’m not sure what to do anymore,” Ms. Nicholson said. “Every time I turn around, the rules have changed, making it harder for me to get a place.”
Ms. Nicholson, fortunately, did not lose her deposit, because the builder never cashed the deposit check. Some have not been so lucky, however.
“It depends upon the individual contract you sign with the builder,” Mr. Gumbinger said. Besides amassing a more sizable down payment, buyers need to make sure their finances are in order.
“People can’t push the envelope like they could in the past,” said Allyson Bernard, an owner and broker with Real Estate Professionals of Connecticut. “You have to show much more documentation and financial history. Things that could slide 12 months ago aren’t sliding anymore.”
Foreign buyers with no credit history in this country are finding it particularly tough to get mortgages, Ms. Bernard said.
“Some people come from a country where there is corruption and graft, so they’re distrustful of banks,” she said. “They have to find a bank they’re comfortable with, open a checking account and start running their income and bills through a bank. They need to show a pattern over two, three, four months.”
Sometimes the mortgage hinges on issues completely out of a buyer’s hands. Ms. Madlin recalls a young couple who were preapproved for a mortgage, but at the last minute were turned down anyway. Even though the appraisal matched the selling price, she said, “the bank thought the price was going to drop in the next six months.”
Those looking to sell one place and move into another are finding that lenders are much more reluctant to hand out bridge loans, according to Ms. Madlin, who says that banks are telling potential buyers to sell their first property before trying to buy another.
Ms. Bernard advises people to plan ahead. “They can’t wake up one day and say they’re going to buy a house,” she said. “They need to sit down with a Realtor and know what to do. If there’s something on your credit report, it can take a long time to clean up.”
Also, “leave no stone unturned,” Mr. Gumbinger added, when looking for a suitable mortgage. Buyers will need to look at options they may not have thought of before, like mortgages for military veterans or from credit unions or labor unions; such organizations may have good rates and can help guide buyers through the loan process.
There are also state and federal programs; for example, New York has the State of New York Mortgage Agency to assist low- and moderate-income buyers.
The Federal Housing Administration, which does not make loans directly but insures loans made by private lenders to home buyers, has seen an increase in the number of loans it has insured over the last few years. The F.H.A.-secured mortgages are available at many banks and usually require no more than 3 percent down, at competitive rates, to anyone with a fairly good credit history and debt-to-income ratio of no more than 43 percent, including the mortgage.
To help stimulate the economy, Congress passed a bill, effective in March, which, among other things, raised the ceiling on the loans that the Federal Housing Administration can give through the end of this year. The maximum loan is now 125 percent of the median sales price for the area, ranging from a maximum of $729,750 to a low of $271,050 depending on the location. (Previously, the agency’s limits were a low of $201,160 and a high of $362,790.) Congress is considering bills that would permanently raise the loan limits.
According to an agency spokesman, more people are opting for F.H.A. loans. In the last two fiscal years, the agency insured about 425,000 loans. It projects that in the 2008 fiscal year, the number will be 1.6 million.
While buyers may bemoan the greater difficulty in getting a loan, most real estate brokers and mortgage brokers agree that the current situation is no surprise.
“There was such greed by the lenders to have their bottom-line balance sheet show a profit, that they gave out programs to people they probably shouldn’t have,” said Mark Grossman, the president of the Mountain Mortgage Corporation, which based in Union, N.J. “They didn’t care about the homeowner.”
“But it’s all cyclical,” he added. “When it’s too much one way, everyone goes overboard the other way. I’ve been in this business since 1972 and eventually in a number of years, everyone will forget what happened and we’ll see the same syndrome.”