What Sort of Loan Can I Get? (October 2008)

Having had two separate very qualified buyers ask me if they could get a loan in the last two days was kind of an eye opener to all of the hype out there about how difficult it is to get a loan currently.

Things have swung just as far the opposite direction to how they were at the top of the market. Instead of far too easy, lenders are making it significantly harder to qualify for a loan than they really should. This won't be permanent, but right now with mortgage investors in "panic meltdown" mode, the lenders have to show them that every loan they give out really is a good loan. Therefore, the underwriting standards have been tightened - I believe over-tightened. But there are still loans available.

The first thing we need to go over is that stated income is essentially dead - if it were in a hospital, there would be no nervous activity, and the body would be relying upon artificial life support to keep the heart and lungs going. Freddie Mac is still theoretically willing to buy them for self-employed borrowers, but it's very hard finding a lender willing to fund it in the first place, and both them and NINA (aka "no ratio" loans) are going to be regulated completely out of business very soon. For those who are not self-employed, they are already gone. If you want to talk about there being lots of folks who will be unable to get real estate loans, despite having good credit, a good income, and a substantial down payment, I would have to agree with you that the situation is bad. Unfortunately, we have seen proof that there is just too much abuse.

Now my clients have always been 95% full documentation. But if you're someone who relied upon "liar's loans" to make the whole real estate process seem painless and easy in order to enable people to stretch for properties that they cannot really afford, or any of a number of other problems, this is the apocalypse. I think that it's a good thing these folks are complaining so much - it's a red flag about the way they do business, telling you to stay away. If you want to know why it's a red flag, ask them for a list of their clients during the period the market was hot, and see how many of them have had a Notice of Default (or worse) recorded against the property. As of right now, my total is zero.

There is one thing you can say about full documentation loans: They prevent people from stretching to buy properties that they cannot really afford. Before I move on, I should say that there are non-residential alternatives - but the down payment and interest rates will be much higher.

To counter-balance the demise of stated income, the allowable debt to income ratio has not moved at all. A paper is still looking at 45% back end debt to income ratio, FHA will accept 43%, with waivers for higher if there are decent reserves pretty easy up to 49%. So you can still afford a loan that is just as many dollars as ever, but you'll have to have a bit more in other departments.

Credit Score has tightened up considerably, particularly in conjunction with Loan to Value Ratio. When three years ago, a 620 credit score was good enough to get you 100% financing on a stated income loan (subprime), these days the lenders want to see decently high credit scores. A paper lenders are wanting to see 680 or 700 credit scores from anything over 80% financing. The few subprime lenders left are trying to reinvent themselves for the A paper and government market. Those folks with lower credit scores are being asked for higher down payments. Two years ago A paper full documentation loans at 100% of value (albeit with PMI) was very doable. Not so today. The PMI insurers don't want to touch anything over 90% loan to value no matter what the credit score, and neither do the second mortgage holders. I think I may have the ability to get 95% financing for non-government loans, but I won't be certain until someone asks for it and it actually funds.

Lenders are very skittish about low down payments. The only ways that I'm certain I can get a less than ten percent down payment through is with a government guarantee on it - either VA or FHA. On the plus side, the government has finally acted to increase the FHA loan limits, and lenders are deciding to accept the VA guarantee for larger loans as well, the limits that made these programs useless in higher cost areas have now been amended to the point that they are useful. Now, once upon a time, VA and FHA loans did not require a credit score, but lenders have now instituted minimum credit scores, even with the government guarantees these loans carry. They want to see anywhere between a 580 and 640 minimum credit score, depending upon the lender, in order to fund these loans. Note that even a 640 credit score is still eighty points below the national median credit score of 720. They're not trying to cut folks off from home loans. They are trying to cut off the worst credit risks, as just because there's a government guarantee does not absolve them of their responsibility to deny credit for applicants that have a history of bad credit and are therefore a good bet to repeat the performance. In financial circles, this is called "due diligence."

A 640 to 680 credit score is very attainable quickly (and usually cheaply) if only you will work at it - pay your bills on time, use credit responsibly, and maybe clean up some past problems. I have seen a guy less than three weeks out of Chapter 7 bankruptcy with a 686 credit score. I keep telling people this, but it doesn't seem to be getting through: Your credit score is worth obsessing over, and any instances where you may think you got away without paying for something are likely to cost you far more than you think you got away with. These days, it may be the difference between getting a home loan during what is almost certainly the best buying opportunity there will ever be again (at least here in San Diego, and probably in most other high cost areas), and not being able to get a home loan at all.

So what is available? I'm holding these rates overnight so that they're no longer current quotes, but without any points, I had a 30 year fixed rate loan at 5.90 percent while I was writing this. Keeping in mind that there is always a tradeoff between rate and costs of a mortgage loan, the best thirty year fixed rate loan that I could do for one point or less was at 5.75 percent (0.8 points), and if you were crazy enough to want to pay four points, you could have gotten a rate as low as 5.25%. I'm going to publish these without looking at the rates in the morning beforehand - they won't be identical, but should be within the same ballpark. This was for an 80% loan to value ratio, loan amount between $110,000 and $417,000, credit score of 720: right on the national median credit score, in the range of loan amounts that are what most folks want, and right on the traditional loan to value ratio. There are adjustments and such if you want a higher loan to value ratio, as well as PMI, but loans are very obtainable so long as you limit yourself to buying property you can prove you can afford, as is required by full documentation. FHA loans have a different structure and go to 96.5% loan to value ratio, and VA loans go to 103% loan to value ratio (a well earned benefit for those who serve honorably in our military).

My point is this: There's a lot of Chicken Littles out there right now, running around squawking about the sky falling, and the economy does have problems (the magnitude of which was largely caused by those Chicken Littles running around telling people how awful things were - I'm looking at you, Charles Schumer, among others). But on the level of one buyer of real estate who needs a loan, loans are very obtainable. Indeed, if lenders weren't willing to write new loans, they might as well close their doors and dissolve their loan programs. They wouldn't have to keep paying their loan folks in that case. However, lenders want very much to make good loans that have a good chance of being repaid.

Caveat Emptor