The Mortgage Paradox: Make More Loans, Tighten Criteria

September 01st, 2010

The current mortgage market is very frustrating. You read about historically low mortgage rates, about programs designed to help boost homeownership or assist owners in keeping their homes, but when inquiring about a new home mortgage or refinance many find it incredibly difficult to get a loan. What is happening? Mortgage calculators show what price home you can purchase, or how much you can lower your monthly mortgage payment, but the lender seems to not want to make you a loan. Why?

Secondary markets tighter

Almost all mortgages made today are either sold to Fannie Mae or Freddie Mac for conventional mortgages or Ginnie Mae for FHA or VA mortgages. These are called secondary markets, and more commonly referred to as GSEs, or Government Sponsored Enterprises. Furthermore, FHA mortgages also must be insured under the FHA mortgage insurance program.

Once your mortgage is funded it is then packaged with several thousand other mortgages from the lender and sold to whichever secondary market guidelines were used to underwrite, approve and fund the mortgage. When the loan gets to the GSE it is audited to ensure that it does in fact meet the criteria and guidelines for purchase. If it does not, the lender must repurchase the loan from the GSE.

It is the repurchase agreements and the loans that are being sent back by the GSEs that are creating tighter underwriting standards by lenders.

“Why won’t the lender just lower my rate?”

This is a common question asked of mortgage originators. It makes sense, a lender is currently getting 6 percent on a mortgage, rates are in the low 4’s, the lender knows you are going to refinance, why not just lower your rate and keep you?

The reason is that the lender does not own the mortgage, one of the GSEs owns the mortgage. To “just” lower your interest rate the lender must track through the GSE to the investor and see if they want to lower your rate. You can imagine the logistical difficulties for lenders tracking back every mortgage inquiry to determine if an investor is willing to lower the interest rate on a particular mortgage.

It is far easier, and cheaper, for the lender to refinance your mortgage with a new mortgage, or to accept the payoff should you refinance with a new lender. If you have been using refinance calculators to determine your savings with a refinance mortgage plan on getting a new mortgage and not a re-write of your existing mortgage terms to a lower interest rate.

Tighter criteria

Because lenders are wary of “buy-backs” or repurchasing loans sold to the GSEs that do not meet their tighter, and changing, guidelines, the underwriting standards for the lenders have gotten tighter as well. Debt to income ratios are dropping; if you are using prequalification calculators consider 45 percent to be the absolute maximum for most programs, and many are lower.

Credit score requirements are increasing; while 580 to 620 used to be the bottom credit score for some programs, now it is more likely to be 600 to 640. Appraisal and property requirements are getting tighter; non-permitted rooms or additions used to be allowed in many circumstances if done in a workmanlike fashion and given no value.

Now many lenders are rejecting the property if any non-permitted additions are present. Even assets and funds for down payment and closing costs now come under increased scrutiny. On many programs if gift funds are part of the closing then you may be subject to tighter debt to income ratios.

Even saving money through a refinance is harder to do as most lenders require a “net tangible benefit” to you of at least a 5 percent savings in your housing payment and a time frame within which you must recoup any closing costs through your monthly savings. If you are using a refinance calculator to determine how much equity you can access leveraging the current low mortgage rates and keeping your payment the same, expect tighter underwriting criteria before getting your approval…and your check.

Do your homework

Before rushing into an offer to purchase a new home or paying upfront appraisal and credit fees for a mortgage refinance, do your homework. Use mortgage calculators to ensure you qualify and check with your mortgage originator to ensure you meet any specific criteria for your situation that may come up.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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