RISMEDIA, August 2, 2010—The lending landscape has changed quite drastically over the past several years. Practices, approvals and standards that were once widely accepted have either vanished or transformed beyond the point of recognition. Many banks, which were once extremely careless with their loan underwriting techniques and approvals, have dug themselves into a significant hole that will take many years to climb out of. Promotions such as “100% Financing” and “No Doc Loans” were both major contributors to the financial crisis banks and consumers are facing today.

Today, banks are making sure they don’t make the same mistakes again, so loan underwriting standards have become more stringent than ever before.

According to a recent Federal Reserve survey, it was found that about 75% of the banks surveyed indicated they had tightened their lending standards for prime, subprime and commercial mortgages. That was up from about 60% in the previous survey. With this sharp increase in lending standards, borrowers are being turned down for real estate loans at an alarming rate.

Here are the top seven reasons banks are denying home loan requests:
1. Poor credit: The borrower may have a heavy down payment or excellent equity built-up in their house, but if their credit score is under a certain threshold, obtaining a new loan or refinance from a traditional bank is challenging. Even FHA (Federal Housing Administration) loans, which have traditionally catered to borrowers with lower FICO scores, have an average borrower credit score of 693, according to CNN Money, which is above the national average.

2. Insufficient liquidity: If the borrower doesn’t have a heavy down payment (20%-30% for most banks) and strong excess liquidity, banks don’t want to take the risk on funding their loan.

3. Lack of income: The borrower doesn’t have consistent proof of income for the last two to five years. Regardless of how good their credit score is or how much equity they have in their home, if they can’t show the bank proof of income, loan approval will be tough. This can be a big hurdle in the loan process, particularly for retired borrowers.

4. Lying on the application: Banks have learned their lesson and are no longer putting up with borrowers stretching the truth on their applications.

5. Debt: Borrower has excessive debt and their debt-to-income ratio exceeds the bank’s guidelines.

6. Unemployment: Most lenders will like to see at least two years of stable work to issue loan approval.

7. Self employment: Lenders are looking at self-employed applicants with a lot more scrutiny these days, making it very tough for these borrowers to get approved.

Obviously some of these newly structured standards are for the betterment of the industry, and our overall economy, but at the same time, home buyers across the country are realizing quickly that reputable credit and stable income aren’t always enough in qualifying for a loan through a traditional bank.

This predicament is not only affecting potential home buyers, but also the real estate professionals who represent them. Real estate professionals nationwide have expressed that this has become a challenging part of the transaction.

According to Monique Bryher (http://www.californiarealestatefraudreport.com/), a broker associate at Keller Williams Realty, “Home buyers are definitely having a harder time in being qualified. Several of the loan officers with whom I work have complained that loans that would have been approved 6 months ago are being denied now. What’s interesting is that loan applications in terms of volume are up, lenders are busy processing them, but it’s harder to get them approved and it’s taking longer to close even simple, straight-forward transactions.”

Once the traditional lending route has been exhausted, both Realtors and potential buyers are often times at a loss of what to do as a backup plan. Private lending has been around for many years, but most borrowers and brokers have no idea that it’s even an option.

“With the strict underwriting guidelines banks are governed by these days, private lending is the wave of the future for getting real estate loans funded,” explains Eric Wohl, president of NoteFlo, an online private lending marketplace launching today. NoteFlo’s unique service allows borrowers to post loan funding requests for free, which will be broadcast out to thousands of private lenders that will bid for the opportunity to fund their loan. “Our goal is to make sure borrowers know that they have plenty of other options if their loan application is denied by a traditional bank,” says Wohl.

For more information, visit www.noteflo.com.

RISMedia welcomes your questions and comments. Send your e-mail to: realestatemagazinefeedback@rismedia.com.

Jack M. Guttentag The Mortgage Professor

Record Lows: Should You Lock in Your Mortgage Rate Now?

by Jack M. Guttentag

(Posted on Thursday, July 22, 2010, 12:00AM)

“Mortgage interest rates are currently at record lows, and it would seem that they couldn't possibly fall any lower. Would you recommend, then, that borrowers obtain a rate lock as soon as they begin the process of shopping for a mortgage?”

 

 Two days after I received this letter, rates dropped again. Nonetheless, the writer’s major point, that at current rate levels there is much greater potential for rate increases than rate decreases, is valid. And that is a good reason for locking ASAP. But it is not the only reason, as indicated by this reader.

“While comparing two lenders, the first lender sent me the GFE and TIL and locked us immediately upon receiving the memorandum of terms of the house purchase. The second lender gave us a rate quote via email that was 1/8% less than that of the first lender for the same lender fees, so we cancelled our lock with the first lender.

But then the second lender told me he needed the signed purchase contract before he could lock, which took one day. Then he told me he needed additional verification of my income, which took two more days. Next he told me that he needed an appraisal, which took more time. By the time he was prepared to lock, the market had changed and both the rate and fees were higher than those offered by the first lender. We had no choice except to close with the second lender.”

This reader locked immediately, then walked away from the lock because he thought he could do better, only to learn (at considerable cost) the difference between a price quote and a price lock. His experience suggests another reason why it is a good idea to lock ASAP:  Lenders who deliberately drag out the lock process may be playing with a stacked desk.

The lender who won’t lock until he has all the data is positioned to cheat. He can low-ball, quoting a price below what he can deliver and to which he cannot be held, the intent being to snare the borrower. He can then raise the price when the borrower is committed and it is too late to back out. In all probability, the second reader was ripped off in that way. Note that such rip-offs depend on the borrower not being able to check the validity of the quoted prices.

Critical Factors

This view that reliable lenders will lock quickly was confirmed by my locking guru, Jack Pritchard. In most cases, he says, the borrower’s credit and a computerized estimate of property value can be obtained within a few minutes, while the borrower’s income can be verified or at least checked for reasonableness within the day. These are the critical factors involved in a lock.

That does not mean that an honest lender will always provide an immediate lock to any loan applicant. Because locking imposes a cost on the lender, no lender wants to lock a loan that is unlikely to close. If the initial information available to the lender indicates that the borrower may not qualify for the requested loan at the posted price, the lender won’t lock. In that situation, the borrower must decide whether the lender has a valid reason for delaying the lock, or is using delay as a tool for gaining a strategic advantage.

There is only one reliable way to answer that question, and that is to determine whether the lender offers an objective method of disclosing its loan prices. If a price is communicated orally, or in an email, the borrower should assume that the lender is trying to game him with the delay.

On the other hand, if the borrower can find his price on the lender’s Web site, there is no strategic advantage to the lender of delaying a lock, because the borrower can check any future lock price. It may be higher or lower than the price on the day a lock was first requested, depending on which way the market has moved, but it is the correct price on the day the loan is finally locked.

Shifting the Burden

If you are dealing with a loan officer who can’t give you a same-day lock, and if you can’t price your loan online, you should shift the burden of proving objectivity to the loan officer. All loan officers today have computer access to the lender’s posted prices and can print the page showing your price. Ask for that page on the day you receive your initial price quote -- it will be your assurance that you have not been low-balled. And ask for a commitment that you will receive an updated version when your loan is finally locked.

Such objectivity in pricing disclosure should also come into play in the event that a price lock is nullified when new information received by the lender invalidates the information on which the lock is based. That happens occasionally when an appraisal comes in unexpectedly low, or there is a hit to the borrower’s credit score. In such case, the burden should be on the loan officer to document the validity of the new price.

Bottom line, “lock ASAP” is a good rule in today’s market, but to make it work effectively, it should be accompanied by another rule: “make the lender document your price.”

 

Mortgage Interest Deduction – by State

by Danielle Hale and Selma Lewis, Research Economists

While only about one percent of recent home buyers cite the tax benefits of ownership as a primary reason for purchasing a home, a significant share of home buyers do actually take advantage of the mortgage interest deduction. According to recently released IRS tax data for 2008 by state, about 26.8 percent, or a little over a quarter of individual income tax filers claimed a mortgage interest deduction (MID) in 2008.

While the homeownership rate in the U.S. is significantly higher (the latest figure for the first quarter of 2010 is 67.1 percent) the difference in the two rates is due in part to the fact that many homeowners do not claim the deduction. This could be for various reasons. Homeowners may choose not to itemize deductions on their tax returns if the interest deduction is not larger than the standard deduction they can claim instead. Sometimes, however, homeowners have paid off their mortgages and have no more interest payments to deduct; NAR research estimates that 32 percent of homeowners own their homes without debt.

On average, among all tax returns, including those for non-homeowners and those who do not deduct mortgage interest, each tax filer deducted $3,279 in mortgage interest. Counting only the tax returns that deducted mortgage interest, the average amount deducted was $12,221.

Not surprisingly, the share of taxpayers who claim the mortgage interest deduction (MID), and the average amount of that deduction, varies by state. In 2008, Maryland had the highest percentage of tax returns claiming the MID, 37.9 percent, but it ranked fifth in the average dollar amount claimed.* The average Maryland tax return claimed $14,162 in mortgage interest. The state also ranked second for the average deduction among all tax returns, $5,372. It is worth noting, that among all states Maryland has the highest share of tax filers who itemize deductions, 49.3 percent. In the US generally, only 34.2 percent of tax filers itemize deductions.

In California, on the other hand, a smaller share of tax filers claimed the mortgage interest deduction, 29 percent, but the average deduction per claimant was the highest in the country, $18,876. California also ranked the highest in average deduction among all tax filers, and due in part to its large population, had the greatest number of tax filers.

In addition to Maryland, Connecticut, Colorado, Minnesota and Virginia, also had very high percentages of tax filers claiming the MID, ranging between 33 percent and 35 percent.

In dollar terms, Hawaii ranked second highest, with mortgage interest deductions averaging $16,730 among claimants, yet only 24 percent of homeowners in Hawaii claimed the MID. Nevada ranked third, averaging $15,502 per mortgage interest deduction. The high ranking of Nevada is likely due to the fact that the state’s fast growth and availability of alternative mortgage products during the housing boom led to many new home owners who deducted substantial amounts of mortgage interest since the interest payment is a high share of the total mortgage payment in the early years of a mortgage. Florida and Arizona are similar cases in which the mortgage interest deduction averaged $13,375 and $13,616, respectively. Notably, the average mortgage interest deduction in 2008 was smaller than the average mortgage interest deduction taken in 2007 in all states except Maine, New Hampshire, Iowa, Alaska, and Montana. The states with the largest decline in the size of the average mortgage interest deduction are Nevada, California, New York, and Florida. The decline in the average MID in Nevada was $2,689.

Although there has not been a large change in the share of filers claiming mortgage interest deduction across the states between 2007 and 2008, there are couple of changes worth noting. Iowa and Michigan
had the largest decreases since 2007, with as much as 3.25 percentage points fewer claimants in Iowa and 1.9 percentage points fewer in Michigan. On the other end, Louisiana and West Virginia had the largest increase in the share of claimants, rising 1.66 and 1.61 points respectively.

Mortgage interest deductions vary from state to state for several main reasons. First, average incomes differ by state. Higher income individuals usually have larger expenses that can be itemized and deducted including state and local income or sales taxes, mortgage interest, real estate taxes, etc. Thus, higher income individuals are more likely to exceed the standard deduction threshold (which is a fixed dollar amount regardless of income) and tend to itemize at higher rates.

Another reason for the difference among states is homeownership rates. Homeownership rates are low in states such as California and New York where rates are 56.5 and 54.4 percent respectively compared to 67.1 percent in the US. One reason for the low homeownership rates may be the high degree of urbanization. Homeownership rates are lower in principal cities, 52.6 percent compare with rates above 70 percent in suburbs and non-metro areas. In New York for example, 43 percent of the state’s population in 2008 was estimated to live in New York City. Low homeownership rates mean high rates of renters who are not eligible to claim a mortgage interest deduction. However, the high cost of homes in cities such as New York mean that those who did claim a mortgage interest deduction in New York, have higher average deduction since homes are more expensive.

Finally, the more recent a home purchase or refinance of a mortgage can also affect the size of the mortgage interest deduction. As in the case of Nevada (see above) and other fast-growing, sun-belt states, new home owners or owners who refinanced can deduct substantial amounts of interest since the interest payment is a high share of the total mortgage payment in the early years of a mortgage.

* This ranking excludes the District of Columbia and the IRS category ‘Other Areas’ which includes returns filed from Army Post Office and Fleet Post Office addresses by members of the armed forces stationed overseas; returns filed by other U.S. citizens abroad; and returns filed by residents of Puerto Rico with income from sources outside Puerto Rico or with income earned as U.S. government employees.

FHA Loans Are Perfect for First-Time Home Buyers

Big Stock Photo

FHA loans began to lose favor in the late 1990s, when home values began to inch upwards, surpassing FHA mortgage limits, and sellers balked at FHA's stringent appraisal¹ guidelines.

How FHA Loans Work
Now, FHA does not make loans or guarantee loans. It insures loans. The insurance removes or minimizes the default risk lenders face when buyers put down less than 20 percent. Without further approval from FHA, its approved lenders are authorized to:

• Take loan applications
  
• Process loan applications
  
• Underwrite² and close the loan

FHA Mortgage Limits
My parents bought our first home in 1955 for $9,000 with an FHA loan. It's almost inconceivable to think of a home costing that today. As a result, FHA periodically changes its mortgage limits. As of January 1, 2009, the maximum mortgage limit in high-cost areas is 115% of local median prices, not to exceed $625,500. The maximum conforming loan limit is $417,000 for single-family residences nationwide. Your area could support a lower mortgage limit. Here is how to find your FHA mortgage limit³.

FHA Loans Allow a Blemished Credit History
If your credit is less than perfect, FHA might be the loan for you. You may qualify for an FHA loan even though you have had financial problems.

• FICO scores⁴ can be lower than those for a conventional loan.
  
• Bankruptcy. You can obtain an FHA loan two to three years from the date of your bankruptcy discharge, as long as you've maintained good credit since your debts were discharged.
  
• Foreclosure. If you keep your credit in excellent shape since a foreclosure, an FHA loan will be available to you two to three years from the final date of your foreclosure.

FHA Loans Boast Competitive Rates & Terms
Today's terms are pretty straightforward. In fact, in many markets the rates and terms are better than those for 80% / 20% piggyback loans. ⁵

• There is little or no adjustment to the interest rate for an FHA loan, as the rates vary within .125 percent of a conventional loan.
  
• Mortgage insurance is funded into the loan, meaning a premium of 1.5% is added to the loan balance instead of being paid out-of-pocket. In addition, a small portion for the mortgage insurance premium is added to the monthly payment, but it is far less than private mortgage insurance premiums.
• As of January 1, 2009, Borrowers can finance 96.5% of the purchase price and put down 3.5 percent. In some instances, when combined with other types of loans, the down payment can be zero.
• Allowable debt ratios⁶ are higher than the debt-ratio limits imposed for conventional loans.

FHA Loans Demand Fewer Repairs
At one point, FHA repair demands were so excessive that sellers would discount the list price to buyers who would agree to obtain conventional loans over FHA loans. Today the requirements appear more reasonable.

• Defective roofs that leak still need to be replaced but an older roof does not necessitate replacement if it doesn't leak.
• Windows that stick upon opening or have cracked panes do not require replacement.
• FHA appraisals do not take the place of a home inspection, never have. Buyers should still obtain a professional home inspection.