Lending Guidelines

Moving forward there are still a great many people that would like to secure new financing but are unable to because of strict lending guidelines. Everyday someone inevitably asks when lending guidelines will loosen. Although we have seen signs of loosening guidelines; generally speaking qualifying standards are going to remain strict moving into the future.

The point of this article is to differeniate between the guidelines that are loosening slightly and the qualifying standards that will remain strict moving into the future.

Certainly we have seen some guidelines loosen as we move into 2010. Point in fact it was not long ago that loan to value limits were raised from 90% loan to value to 95% for conventional loans. This raise in Loan To Value is a significant change, inferring home prices are stabilizing in CA. Should this stabilization continue we could see 100% financing available again for conventional loans. We do not want to get ahead of ourselves but this change is significant because it brings us that much closer to 100% financing.

Another change we have seen is a lender re-entry into jumbo and super jumbo markets. It has been quite sometime since the major lenders participated in this market. In the last couple of years it has been portfolio lenders that were servicing this type of loan. This is not the case anymore as larger lending institutions find themselves offering solutions in this market. Large lenders expanding back into this market is important because it signifies that banks are healthier than they have been and can assume capital risk. This return to the jumbo and super jumbo market also introduces competition that has the potential to lower offered rates in these markets.

Despite these changes qualifying and meeting the specific guidelines required to establish a new home loan are still very strict. If you plan on securing a new home loan you will be required to document your income, assets, and have a credit score of at least 620. Let's discuss these points individually.

Credit. Although a minimum score of 620 is required to secure financing in this market, it should be mentioned not all programs are available to people with a 620 score. Point in fact the lower your credit score the lower the loan to value you will qualify for. In other words someone with a 620 score cannot secure 90% financing, while someone with a 700 score can. In addition lower credit scores result in price adjustments against you, which will result in a higher offered interest rate. This price discrepancy is not likely to change. As for Loan To Value when lenders extend the loan to value to 100% (currently at 95%) the best credit scores will have access to this program first. Unfortunately at this time we have not heard any rumors about 100% financing returning to conventional markets any time soon. Regardless credit scores are still very important. Make sure you score is as high as possible.

Assets. In the past there were programs that allowed people to state assets without documenting them. This is no longer the case. For most programs you will be required to prove at least two months reserves (Principle Interest Taxes Insurance - PITI); for jumbo conforming expect to provide 6 months reserves. For jumbo and super jumbo home loans you may actually be required to open and deposit reserves in a new account at the lending institution. Some require as much as 100,000 in verifiable assets (for loans up to 3 million). The point is verifying assets is something you should be prepared to do. This requires statements that include all pages demonstrating a two month history. Be prepared to source and document any large deposits. As mentioned above in the past stating assets was an available option. I do not expect this option to return to the marketplace any time soon. The simple reason... documenting assets demonstrates the borrower has a emergency fund that they can use should they find themselves out of work. With foreclosure rates the highest on record after the introduction of stated income programs, it is unlikely that they will bring this back.

Income. Documenting income is now a requirement if you plan on securing conventional financing. This requires at least a two year history of tax returns (sometimes three years) and recent paystubs. Although there are some stated income programs now available and offered from private lenders, this is something that we should not expect to see in the conventional markets for quite some time. If you are waiting for a stated income program, our economy is going to need to fully recover and unemployment must fall substantially. Essentially this is the most important qualifying aspect becuase it demonstrates your ability to pay back the loan. It will be a long time before this returns.

These are the major points underwriters consider when looking at a borrower qualifications. Another aspect they consider is the home. Your home is their collateral. Collateral itself has also become stricter. Condos have suffered the major brunt, primarily because they have suffered in value the most. Lenders took note of this and have added pricing adjustments depending on the type of home you are looking to finance. In addition lenders have regionally classified areas based on their level of depreciation. The classification ultimately results in a capped Loan To Value. Of all the guidelines discussed these are probably going to be the first to change. Setting the legal issue of redlining aside (have always been curious how this is not redlining) home values have fallen to what appears to be their lows which suggests these guidelines are no longer applicable, after all they were designed to protect the lender from funding a loan that would result in the property depreciating to a point in which the collateral is worth less than the recently issued home loan.

To wrap up this article we must touch on the fact that some programs we have become comfortable with are temporary programs that we must be prepared to live without. Point in fact jumbo conforming home loan limits here in CA are temporary. That is loans up to 729,500 (cap based on region). At some point in time this is going to disappear placing these people back in the jumbo and super jumbo markets. In addition HARP programs offering financing up to 125% for Fannie and Freddie rate and term refinances are a temporary program that will be disappearing in the future.

If you have been waiting and plan on taking advantage of one of these programs, now would be the time to act. As for loosening guideline - documenting your claimed position on the loan application is something you should be prepared for.