The true impact of these “temporary” increases mandated by the Economic Stimulus Act remains to be seen. In the meantime, I spoke with Ted Maniatis at MPR Financial for the tips on what it takes to get a home loan. Having a qualified mortgage broker look at your individual situation remains vitally important. There are lots of shades of gray as lenders look for new ways to scrutinize what you provide in black and white.
“We expect the impact of these loan limit increases on the housing market to be significant because of the infusion of capital into the mortgage market, which should result in lower interest rates across the board. In addition, there will be a direct impact on high-cost areas that previously required borrowers to take out costlier jumbo mortgages.”– Dick Gaylord, National Association of Realtors 2008 President
To paint a broad stroke, based on my conversation with Ted: Buyers seeking a conforming loan with at least 20% down (verified with two months of bank statements), a good job (with full documentation including one month of pay stubs, 2 years W2s; self-employed individuals need the last two years of tax returns) and good credit (at least 680) still have lots of options. Even so, a home buyer’s budget should take into consideration fluctuations in interest rates.
There are noteworthy exceptions to the rules. For instance, a self-employed buyer may harbor tax returns that show unnatural downturns in income levels (true for me during my baby making years.) If said buyer has 30% down and a 700 or better credit score he/she may only need a statement letter of income to qualify for a loan (instead of submitting the full tax returns.) Sizable down payment and good credit scores can offset the need for full documentation. Down payment money may include a gift from family, provided they are willing to sign off that they do not expect repayment. (Mom, dad, are you listening?) If you are at all unsure, talk to a lender. Often there are creative solutions to the restrictive guidelines.
Beyond the loan application, there is the purchase contract. When negotiating to purchase a home from a seller, make certain to include adequate time lines. Allow for at least thirty days to close escrow. In the recent past, lenders had been performing within twenty-one days. Now, increased scrutiny often means more eyes on the loan package and a longer process. Appraisals also take more time and a contract should allow for at least ten to fourteen day loan/appraisal contingencies. Some lenders are using an Automated Valuation Model (AVM) , a bit like Zillow, to help satisfy their investors. In the past, if a reputable appraiser gave a property the thumbs up, you could be reasonably assured that the bank would approve of the loan amount. Now banks may routinely order an AVM. This automated valuation may conflict with the home appraiser’s valuation. Such a conflict may necessitate a bank ordered appraisal review, and/or the bank may request one or two additional comparable recent home sales. An appraisal contingency can help protect a buyer through this process.
Maintaining adequate time lines and including appropriate contingencies can also buffer against the volatility of interest rates. Fluctuating rates can affect a buyer’s ability to qualify for the requested loan amount. Contingencies can allow buyers the time to confirm and lock rates.
Tip for home sellers: Contingencies and contractual terms are negotiable. Your Realtor should be able to walk you through the contract from a risk versus benefit standpoint. Verifying down payment and the credit-worthiness of your buyer is an important part of this analysis. A strong financial possition may be worth considering, possibly even over a competing buyer’s higher offering price. Many negotiating points in an offer clarify who will take on a given risk. In some competitive situations, strong buyers may be willing to forgo financing contingencies (therefore absorbing the risks) for the benefit of being favorably considered for the purchase. It is worthwhile to examine the buyer’s credentials, regardless of contractual contingencies, in order to assess the buyer’s ability to perform and thus complete the transaction.