Want a mortgage? Not so fast
So you want to buy a home or a second home or an investment property and take advantage of all the great deals around. Well, not so fast. You may think your financial house is in perfect order and getting a home loan will be a snap, but you may be in for the shock of your life.
"Cash is king," another little expression to come out of our current and previous financial disasters, has never been truer than now. According to local and national real estate brokers, most of their recent sales have been with all cash buyers, and there's a good reason for that. Obtaining mortgage financing has always been a difficult and complicated process, but Fannie Mae and Freddie Mac have upped their game passing along tougher and tougher guidelines to banks and buyers.
The minimum credit score that any borrower can have to even think about getting a loan is 620, 850 is the top score. Fannie and Freddie have also increased their emphasis on income relative to debt. For example, if someone's total debt payments exceed 45 percent of income, the mortgage will be denied. Previously this limit was 55 percent. This could eliminate very qualified buyers who should have no problem meeting that debt limit, particularly if they are interested in purchasing an investment property, even if that property will generate income.
There are also stricter guidelines regarding missed payments on credit cards, auto loans and other revolving debt. Previously, it was OK to miss a payment or two, but now one missed payment will hit the debt-to-income ratio because banks will add 5 percent of the outstanding loan balance to the debt part of the calculation.
Loans for condos can be even more difficult. If an association is facing some pending legal liability or if more than 15 percent of owners are behind on homeowner fees or if more than 10 percent of units are owned by a single entity, it could knock your application right out of the park.
New condo associations have even more problems, since in order to approve a mortgage, a majority of at least 70 percent of the units have to already be sold or under contract. This percentage was 51 percent before our financial crisis. The reason for this uptick in percentage is that condo developments, where the builders or sponsors still own a large share of the units, are more likely to get into financial difficulty if the builder or sponsor runs out of funds.
And just when you thought all your financial ducks were in order and you were good to go, you have to face the evil property appraiser. OK, the individual appraisers may not be evil, but their job has sure gotten a lot more difficult. Not only are they having a terrible time finding comparable sales within an acceptable timeframe, but now they have to deal with additional guidelines.
In an attempt to keep appraisers at arm's length from lenders, a financial reform bill was passed on April 1, creating a middle man between the appraisers and the lenders. Not only can appraisers no longer discuss the appraisals with lenders, but the cost of the appraisals has almost doubled to compensate this middle man. Guess who's paying for that.
Even if your application for a mortgage is ultimately approved, by the time you get to that point you'll feel like you were put through a meat grinder. Cash is king. King Midas would agree with that, but unfortunately, we all don't all have the Midas touch.