Wisconsinites’ median credit scores are among the highest in the United States. Yet that tendency toward good credit hasn’t shielded Wisconsin home buyers from the current climate in which mortgage lenders have tightened their guidelines, raising the bar for buyers who need financing.
The biggest hurdle is what Stephen LaDue, a senior loan officer with Prime Lending, a PlainsCapital company, in Brookfield, describes as “ever-changing minimum credit score requirements.” The challenge is twofold: lenders across the board have raised minimum scores required to obtain a loan while many borrowers have experienced a myriad of economic setbacks that LaDue says have caused “ripple effects throughout their credit.” The most common setback is unemployment, followed by such issues as a short sale, foreclosure or bankruptcy.
Some borrowers simply don’t understand the degree to which these incidents can harm their credit, adds Julie Flor, a district mortgage manager at M&I, a part of BMO Financial, in Chippewa Falls. The culture of good credit and diminished social stigma associated with financial problems might explain why some borrowers mistakenly believe they can get a new home loan within months after a foreclosure or bankruptcy.
Tiered pricing bites downpayment savings
A related issue is so-called tiered pricing structures, which trigger higher costs on conventional loans that lenders can sell to Fannie Mae and Freddie Mac, explains Kenneth Dickson, senior vice president of Johnson Bank in Madison. Tiered pricing isn’t about lower credit scores, Dickson says, but rather, is a strategy by which the two government-run secondary mortgage market companies earn fatter fees to strengthen their capitalization. “What used to be a good credit score will increase the cost to a home buyer by as much as $3,000 to get the same loan today that three years ago wouldn’t have had any additional cost,” he says. “It’s not necessarily a case where credit has deteriorated; it’s that the standard has increased.”
“What used to be a good credit score will increase the cost to a home buyer by as much as $3,000 to get the same loan today that three years ago wouldn’t have had any additional cost,” he says. “It’s not necessarily a case where credit has deteriorated; it’s that the standard has increased.”
Yet another hurdle for buyers is the downpayment, says Laura Stanfield, a mortgage loan officer at Waterstone Mortgage in Madison, a subsidiary of Watersthone Bank. The U.S. Department of Veterans Affairs and the U.S. Department of Agriculture Rural Development agency still offer zero-downpayment mortgages, but those government-backed programs are limited in their reach and are the exception, Stanfield explains. That means most buyers have to come up with at least a few percentage points of the sale price to qualify for financing, a considerable challenge for those who don’t have savings or gift funds.
Tiered pricing adds another twist to the downpayment dilemma, Dickson says, since higher loan fees mean even those buyers who’ve saved or received a gift still have less cash for the downpayment and closing costs.
“The people who are creditworthy have to pay so darn much money to get a mortgage,” he says, “that they choose not to buy or they can’t buy because they don’t have enough money for both closing costs and downpayment.”
Documentation is yet another challenge. First-time buyers tend to be aware of this issue, but repeat borrowers are likely to be caught off guard and dismayed at the amount of paperwork, says Jim Pope, a senior mortgage consultant at WinTrust Mortgage Corp. in Madison.
Documentation of gift funds, credit dings and the like might be routine, but income documentation can be more difficult. One example Pope cites is year-end bonuses, which can’t be counted toward the buyer’s debt-to-income ratio unless the employer confirms the earnings are likely to continue, a stipulation employers generally are loath to make.
Income documentation trips self-employed
Buyers who are self-employed and aggressive about their federal income tax deductions face a unique challenge, having traded greater home-purchasing power for a lower tax bite, Flor explains.
“These buyers,” she says, “need a couple of years of positive income before they can buy a house.”
Some buyers, Flor adds, are so unaware of income guidelines that they quit their job just before or soon after they apply for a loan, making it much harder for them to qualify.
Home repairs might not seem like a major issue in a buyer’s financing, but Pope points out that lenders take a keen interest in property condition reports or disclosures referenced in purchase contracts. If a contract notes that a buyer is in possession of such a report, the lender will scrutinize it and likely demand that repairs be made prior to loan approval.
“It begins to open a bag of worms of stuff the lender will ask about,” he warns.
Condominiums, in particular, “are getting a tough rap right now,” Pope also says. Some properties aren’t approved by the Federal Housing Administration (FHA); others have substandard fidelity bond coverage, inadequate reserves for major repairs or too many owners who haven’t paid their association dues, among other woes - any of which might mean no financing for prospective buyers.
How REALTORS® can help
These challenges don’t always have easy solutions, and REALTORS® may be understandably reluctant to involve themselves in the mortgage process. Still, there are ways REALTORS® can head off foreseeable problems before they happen, loan pros suggest.
A good option for buyers who are short of cash might be a home buyer downpayment assistance program, Stanfield explains. The Wisconsin Housing and Economic Development Authority, for one, offers first-time buyers a 10-year, $3,000 loan toward their downpayment and closing costs, and allows buyers who meet the program’s income restrictions and credit guidelines to make a downpayment of just 3 percent. Other programs are offered by various city and county agencies and nonprofit organizations. Stanfield advises REALTORS® to educate themselves about these programs and know when they might work for a buyer.
While some loans sail smoothly through the process, a seven-day financing contingency and 30-day close are just not realistic for most situations. Consequently, Flor advises, it’s best not to write those terms into a contract. Instead, she says, REALTORS® should try to “set the right expectations upfront.”
A question of comps
Since appraisals are often sticking points, REALTORS® are also advised to be aware of comparable-home sales that could support a higher valuation, but might not turn up in an appraiser’s search of the multiple-listing service (MLS) or public records, LaDue suggests. Appraisers “can’t necessarily find every sale,” he says, while the REALTOR® might have access to additional data that could be helpful.
Pope takes that advice to the next level, suggesting that REALTORS® should demand a field review if a lender claims a loan can’t go forward due to a lack of comparables for an appraisal.
“I want them to challenge a lender who tells them there are no comps,” he says. “That’s not an excuse not to make a loan these days.”
Pope also says REALTORS® should research condominium issues and round up necessary documents before prospective condo buyers apply for financing. The paperwork typically might include a condominium questionnaire, a copy of the association’s budget and information about reserves, among other items. The goal, he says, is to not “waste everybody’s time” if conventional or FHA financing isn’t an option for that property.
LaDue concurs, saying REALTORS® should direct buyers away from problematic condos.
“Because of the economy,” he says, “more and more condo projects have too many delinquencies in association dues. That might prevent anybody from getting financing, and when that happens, you can hear the values dropping.”
Cows stop conventional financing
Cows, crops or other signs of farming are another example of a situation that needs to be fully disclosed upfront in the loan process because the property might not be eligible for conventional or FHA financing, Pope explains.
“‘Tillable’ is a dirty word to Fannie and Freddie,” he says, “If they see ‘tillable,’ they assume it’s a farm, it’s a whole different set of circumstances for foreclosure, and the property just doesn’t qualify for their financing.”
All that said, the first line of defense is to always make sure buyers are prequalified or preapproved for a mortgage before they begin shopping for a home, Dickson advises. A preapproval helps to ensure that the buyer’s credit score, self-employment income or other issues won’t derail the process after he or she has an accepted purchase offer in hand. Preapproval also offers greater clarity as to how much the buyer can qualify to borrow.
“REALTORS® shouldn’t be carting people around,” Dickson says, “until they’re prequalified by a local lender.”
Marcie Geffner is a Los Angeles-based freelance reporter, writer and blogger who specializes in real estate, mortgage and personal finance.