Realtors and home shoppers need to realize home loan financing is not as easily available anymore

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

No matter what anyone tells you (including me) about whether it?s a good time or not to buy a home (it?s a terrible time in 9.5/10 cities) there are some important financing considerations that you and your Realtor need to be aware of if you choose to buy before you fall in love with your ?dream home.? While you may feel that certain situations warrant jumping in to the home market, the bottom line is now is not a good time to do it. Even if you are relocating or have faced a major life change, the prudent move in this market is to rent and look for better opportunities. However, if you choose to enter the market (at your own peril) you need to be aware of the recent changes in the home loan market that may make your home search more difficult than it has been in the past few years.

Please note that while these changes may adversely impact your ability to personally purchase a home, they are healthy corrections to a bloated and broken lending industry whose past indulgent and irresponsible lending behavior has put us in our current mess.

Edit: Please note I initially said that there are some times when you are forced to buy; I have been thoroughly convinced that my initial statement was, in fact, erroneous and that you are never “forced” to buy – it is always a choice. Thanks to my readers for bringing that to my attention. – Morgan

With that said, here are some of the important changes that have occurred in the home financing market lately.

100% Financing is Dead

The first thing to realize is that the cheap, easy money is gone. The days of buying a home with no money down are a thing of the past for all but the most credit worthy individuals. 100% financing using stated income with a 620 FICO score is no longer a valid option. It is a return to sanity in underwriting; but is also a major paradigm shift from the lending standards of the last few years. More importantly this shift has occurred, for the most part, over the last quarter. If you are living even a few months in the past, today?s home purchase market is a completely new ballgame from when you last checked in.

The remaining home loan programs that provide 100% financing options for home buyers are primarily reserved for two types of audiences.

Those that qualify as 1st time home buyers under MyCommunity Mortgage and similar programs, and;
Those that qualify with credit scores north of 720

And even in these two groups of people the caveats on 100% financing are many. First and foremost proof of the ability to repay the mortgage has re-emerged as the most important lending determinant (it had acquiesced to credit score for the last several years). This means that 100% financing is primarily available to only those who can prove (via full documentation loans) that their income can support their new home debt obligations.

Prospective home buyers and their Realtors need to spend the time upfront to determine financing options with a knowledgeable mortgage professional when attempting to purchase a home with 100% financing. Besides the MyCommunity Mortgage programs listed above, there are other niche homebuyer assistance and financing programs that may fit the unique needs of individual buyers. Providing a mortgage professional the maximum amount of time to cross-check the buyer against these niche products can result in a much better loan program for the buyer. And often these products can be the difference between qualification and ineligibility.

Jumbo Home Loans are Fragile

The jumbo home loan market is still struggling. While many respected bloggers have called an end to the credit crunch there is no denying that jumbo loans have continued to suffer from limited availability due to tightened underwriting guidelines and a repricing of risk by those that write jumbo loans. This means that while there is some life in the jumbo loan market (after being completely shut down in August); the restrictions on jumbo home loans are severe.

The primary impact of higher jumbo rates is a reduction in the number of qualified applicants looking for home financing. There are just not many job types out there that provide an annual income stream that can service a jumbo-sized debt obligation. This makes shopping for a home in high cost areas such as Orange County a hairy proposition; as many of the counties properties fall far outside the conforming loan limit guidelines.

In response Realtors and potential home owners need to evaluate whether their income and asset position is strong enough to service a jumbo loan amount. Again, full documentation of income is a requirement now for most loans in the jumbo category. Stated income products are now reserved for the select few who have exceptional credit and/or asset backgrounds.

This new reality demands a full consultation with a loan professional before hitting the streets to find a new home.

Payment Option Loans are Restricted

One of the favorite loan products of the last few years has been the negative amortization, Pay Option home loan. This loan, which trades home equity for a minimum monthly payment, was used inappropriately by many homebuyers during the boom who sought to purchase a home beyond their reach using traditional financing vehicles. While this sentiment of ?reaching? remains in home buyers; the choice of a pay option loan has been severely curtailed. If a potential homebuyer is considering a payment option loan to qualify it behooves the Realtor to insist that the homebuyer receive a full approval on the payment option loan before spending too much time shopping for a new home.

These loans, once the darlings of the financial markets, have become overly restricted in terms of underwriting guidelines; making them out-of-reach for most would-be home buyers. Again, while I consider this a positive development for the health of the market, it is imperative that Realtors and home buyers understand the ramifications that the change demands during the home shopping process.

Conservative Thinking Prevails in a Down Market

Realtors who are struggling to sell homes are obviously enthusiastic when, in this parched landscape, a homebuyer says their ready to buy; but it is imperative that Realtors take a conservative approach to qualifying the buyer and identifying properties that are truly affordable to their new client. The key is remembering that ?affordable? has been completely redefined by lending institutions over the last half-year.

By taking a more conservative approach Realtors have a better chance of completing the transaction than by pushing for the largest home purchase possible. For too many borrowers and Realtors the mirage of the ?reach home? has become just that, a mirage not supported by the current home financing climate.

What have you seen out on the market? If you are a Realtor or a home buyer in the market let us know how the experience has gone for you.