Tough loans
Spending a little less this holiday season may not be what local merchants want to hear but it could make the difference between owning a home and remaining a tenant. While homebuyers have many advantages in our current market, an easy time financing a home isn’t one of them. Lenders are becoming increasingly discriminating when lending money. Home ownership isn’t for everyone anymore. It’s only for those determined enough who can prove a history of saving, a steady secure income and prudent credit management.
Up until a few years ago, making the decision to buy a home was a major lifestyle commitment. It required advanced financial positioning to insure that a lender would make a favorable determination in granting a mortgage. Saving for a downpayment required financial sacrifice. Eliminating debt in order to qualify for a loan was a priority and paying monthly bills on time became an obsession. Buying a home was so important that it was considered an intragal part of the “American Dream.” It was a place of permanence, an opportunity to become a responsible part of the community and raise a family. There were milestones along the road of life worth the required sacrifice and homeownership was an important one.
Somehow that changed a bit. Buying a home became as easy as buying a car. Lenders became increasingly creative in their quest for profits and home financing became their vehicle of choice. Traditionally, lenders had considered a home mortgage as a secure but boringly long-term use of their money. The thirty-year conventional mortgage with fixed qualifying guidelines was routine with down payments averaging 10 to 20 percent. Government insured loans were popular with buyers who had less than a 10 percent down payment. That arrangement worked quite well for 40 years.
Lenders began tampering with traditional loan qualifying guidelines in 2000. They discovered that less was more. The less qualifying requirements imposed on borrowers, the more business in loans they could generate. Since the loans did not meet the set traditional qualifying guidelines, lenders sold these non-traditional but high yield loans to investors through Wall Street. This creative financing experiment became so successful that national lenders were rewarded with record growth and billions in profits. The competition in promoting the most creative loan program was fierce. It was a lending free for all. No credit?…no income?…no job? No problem!
The pendulum, as it always seems to do, has swung in the opposite direction. Lenders are over correcting for their past lending exuberance. Faced with an increasing number of mortgage defaults, Congressional investigation and unable to sell their non-conforming loans to investors, lenders are subjecting every loan applicant to greater scrutiny than ever before.
Financing a home isn’t going to be the slam-dunk that it was last year. It’s going to be more difficult and take longer. The California Association of Mortgage Brokers estimates that 25 percent of all loan applicants during September and October were turned down for a mortgage. The California Association of Realtors is also concerned. "Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months," said C.A.R. President William E. Brown. The decline in sales at the upper end of the market, resulting from mortgage turndowns, has contributed to a significant decline in the statewide median price. Today’s homebuyers have their best opportunity in years to own a home. The number of competing homes on the market is high, forcing sellers into deep discounts and concessions not seen in 10 years. Home prices in El Dorado County continue to decline making them more affordable than ever and interest rates are historically low. But with foreclosures rising and prices falling, prospective homebuyers will need to clearly demonstrate that they are financially mature enough to warrant the lender’s risk. Here are a few traditionally proven concepts necessary to convince a lender that a borrower is ready or homeownership.
Get some money in the bank. If Santa isn’t expected to bring a package full of cash to your house this year, it’s up to you to bank as much as possible. Being thrifty is a prerequisite to homeownership. Most of our expenditures are discretionary. We have choices. Spend money for what you need not for what you want. Demonstrate the ability to save. There are still loan programs that do not require a downpayment but they all have closing costs and they all require thousands of dollars in cash reserves. If buying a new high definition plasma is more important than a home, you are not ready.
Pay off as much debt as possible. I know this is a unique concept but when evaluating a loan applicant, debt is bad and saving is good. Having an established good credit history is necessary to demonstrate financial self-discipline. Credit card balances should be kept to a minimum. If you’re addicted to charge cards and minimum payments forget about buying a home.
Ask for help. It’s okay to ask for help and advise. Unsure how to get started? How much of a home you can afford? How does your credit report look? Seek out a trusted advisor, tell them you want to position yourself to buy a home and ask them to look at your situation. Local Realtors and mortgage originators are a good source of information. Ask lots of questions. Too many currently defaulting borrowers didn’t ask enough questions about their resetting adjustable rate mortgage. Don’t make the same mistake.
Up until a few years ago, making the decision to buy a home was a major lifestyle commitment. It required advanced financial positioning to insure that a lender would make a favorable determination in granting a mortgage. Saving for a downpayment required financial sacrifice. Eliminating debt in order to qualify for a loan was a priority and paying monthly bills on time became an obsession. Buying a home was so important that it was considered an intragal part of the “American Dream.” It was a place of permanence, an opportunity to become a responsible part of the community and raise a family. There were milestones along the road of life worth the required sacrifice and homeownership was an important one.
Somehow that changed a bit. Buying a home became as easy as buying a car. Lenders became increasingly creative in their quest for profits and home financing became their vehicle of choice. Traditionally, lenders had considered a home mortgage as a secure but boringly long-term use of their money. The thirty-year conventional mortgage with fixed qualifying guidelines was routine with down payments averaging 10 to 20 percent. Government insured loans were popular with buyers who had less than a 10 percent down payment. That arrangement worked quite well for 40 years.
Lenders began tampering with traditional loan qualifying guidelines in 2000. They discovered that less was more. The less qualifying requirements imposed on borrowers, the more business in loans they could generate. Since the loans did not meet the set traditional qualifying guidelines, lenders sold these non-traditional but high yield loans to investors through Wall Street. This creative financing experiment became so successful that national lenders were rewarded with record growth and billions in profits. The competition in promoting the most creative loan program was fierce. It was a lending free for all. No credit?…no income?…no job? No problem!
The pendulum, as it always seems to do, has swung in the opposite direction. Lenders are over correcting for their past lending exuberance. Faced with an increasing number of mortgage defaults, Congressional investigation and unable to sell their non-conforming loans to investors, lenders are subjecting every loan applicant to greater scrutiny than ever before.
Financing a home isn’t going to be the slam-dunk that it was last year. It’s going to be more difficult and take longer. The California Association of Mortgage Brokers estimates that 25 percent of all loan applicants during September and October were turned down for a mortgage. The California Association of Realtors is also concerned. "Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months," said C.A.R. President William E. Brown. The decline in sales at the upper end of the market, resulting from mortgage turndowns, has contributed to a significant decline in the statewide median price. Today’s homebuyers have their best opportunity in years to own a home. The number of competing homes on the market is high, forcing sellers into deep discounts and concessions not seen in 10 years. Home prices in El Dorado County continue to decline making them more affordable than ever and interest rates are historically low. But with foreclosures rising and prices falling, prospective homebuyers will need to clearly demonstrate that they are financially mature enough to warrant the lender’s risk. Here are a few traditionally proven concepts necessary to convince a lender that a borrower is ready or homeownership.
Get some money in the bank. If Santa isn’t expected to bring a package full of cash to your house this year, it’s up to you to bank as much as possible. Being thrifty is a prerequisite to homeownership. Most of our expenditures are discretionary. We have choices. Spend money for what you need not for what you want. Demonstrate the ability to save. There are still loan programs that do not require a downpayment but they all have closing costs and they all require thousands of dollars in cash reserves. If buying a new high definition plasma is more important than a home, you are not ready.
Pay off as much debt as possible. I know this is a unique concept but when evaluating a loan applicant, debt is bad and saving is good. Having an established good credit history is necessary to demonstrate financial self-discipline. Credit card balances should be kept to a minimum. If you’re addicted to charge cards and minimum payments forget about buying a home.
Ask for help. It’s okay to ask for help and advise. Unsure how to get started? How much of a home you can afford? How does your credit report look? Seek out a trusted advisor, tell them you want to position yourself to buy a home and ask them to look at your situation. Local Realtors and mortgage originators are a good source of information. Ask lots of questions. Too many currently defaulting borrowers didn’t ask enough questions about their resetting adjustable rate mortgage. Don’t make the same mistake.
posted by Ken Calhoon at 8:50 AM
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