A harder time finding home loans
Financial crisis pushes lenders to return to the tougher credit standards of a few years ago
It’s going to be more difficult and expensive to get a mortgage, as consumers in Western New York and nationwide have to jump through added hoops or pay a little more in interest or fees, local bankers and mortgage brokers said.
Lenders say consumers still can get a traditional mortgage if they put enough money down and have good credit.
But it’s no longer going to be as easy for those with past credit problems or insufficient savings, or for those buying more than a single-family house or purchasing a home as an investment. Home equity lending has also been restricted.
“It has been steadily getting harder to obtain a mortgage since August of 2007,” said Michael Florczak, senior loan officer at MultiSource Funding, a Cheektowaga mortgage broker.
“We’re paying for the sins of the rest of the country,” said Frank Sardina, regional sales manager for residential mortgages at First Niagara Financial Group.
Going forward, borrowers will have to fully document their income and ability to pay, presenting financial statements, pay stubs or vouchers, or tax returns as proof. The era of just stating income without documenting evidence is over.
Home buyers also may not be able to borrow as much as in the past. They’re also going to have to put at least a 5 percent down payment just to get a loan, and at least 20 percent to avoid private mortgage insurance, as the time of full financing is gone.
“There are certainly loans that I did a year ago that I couldn’t do now,” said Linda C. Mallia, president of Hunt Mortgage.
And they’re more likely to have to pay extra fees in the form of higher interest or “points” on their loan if their credit isn’t absolutely stellar, even on Federal Housing Administration (FHA) loans. The minimum credit score to avoid fees has been raised sharply, and the fees themselves have increased. And people below a certain score simply won’t get loans now.
“You need to be able to show you’re creditworthy, because the alternatives for people who didn’t have the money for a down payment or had bad credit are gone,” said Nick Buscaglia, group vice president and regional residential mortgage manager for M&T Bank Corp.
Grace Smokowski and her fiance, Brian McKenzie, are hoping to buy their first home, a small ranch house in Lackawanna. Both have high credit scores, so they started seeking a mortgage, contacting two banks and two mortgage brokers before settling on Bank of America because it offered the most stability and the best rate — 6.8 percent, fixed, on a $95,000 loan.
They were surprised to learn they had to show two months of bank statements, two months of pay stubs, a description of their assets and liabilities, their Social Security numbers and their drivers’ licenses — all “before they’ll even look at you.”
“It’s amazing what they want. That was quite telling to me, what their screening process is right now,” said Smokowski, 36, who is the education coordinator at Housing Opportunities Made Equal. “I didn’t think it would be as difficult as it is.”
But bankers say some of the changes are just a return to traditional, conservative lending.
“We’re just back to where we were several years ago,” Buscaglia said. “It’s like the last several years never existed.”
“It’s in some ways a reversion to almost old-school real estate,” said Bank of America spokesman David Bradley. “You’ve got to come up with a down payment, got to have a good credit score, and got to understand the real estate market.”
Meanwhile, mortgage interest rates are rising again, after falling immediately following the government takeover of Fannie Mae and Freddie Mac. That caused a spike in applications, as borrowers flocked to take advantage. But Freddie Mac said average rates on a 30- year fixed mortgage ticked up this week to 6.08 percent from 5.82 percent, and its index measuring applications fell 10.6 percent.
Credit crisis fallout
Politicians, regulators and business executives nationwide are warning that the continuing credit crisis on Wall Street may cause a complete shutdown in lending if Congress doesn’t approve President Bush’s proposed $700 billion bailout plan.
But such statements frustrate and anger executives at smaller community and regional banks, who complain that those officials don’t differentiate between the troubles of investment banks and the relative health of commercial banks.
Most of the banking industry avoided the riskiest lending and investing, they say, and is still healthy. In particular, they reiterate the nationwide crisis didn’t affect the Buffalo Niagara area as much as other places.
As a result, they say, it’s still business as usual for them. Indeed, many say their loan volume is up from a year ago.
“We’re open for business. We have money to lend,” said Peter G. Humphrey, CEO of Financial Institutions, the Warsaw- based parent of Five Star Bank. “The majority of the banking system is healthy and making loans, but we’re doing it in the disciplined fashion that we’ve been doing it for decades.”
“We actually have always been conservative in our lending decisions. So we haven’t really made our customers jump through more hoops,” said Mary Jo Shults, Evans Bank vice president of mortgage lending.
However, they acknowledge that underwriting standards have tightened significantly and lenders are demanding that borrowers put more skin in the game. That’s an indication of how much conditions changed.
Fewer options
So what does that mean to the average borrower? First, the available options have narrowed sharply for all but the most creditworthy customers.
Many lenders are only making “conventional” loans that fit the criteria for purchase by Fannie Mae or Freddie Mac. That no longer includes many low-documentation or low-down payment loans. Or they have to be backed by the Federal Housing Administration (FHA), the State of New York Mortgage Agency (SONYMA) or other agencies.
“Everybody’s being a little more cautious,” said Jean Berry, program director at Home- Front. “It has rippled down, even to the prime loans. They’re taking a second look at everything.”
And subprime loans — for borrowers with bad credit — and “Alt-A” loans — for borrowers that can’t or won’t prove income — are almost impossible.
Tougher standards
Also, consumers used to be able to get financing for 100 percent — or more — of their home value, using home equity loans or second mortgages to “piggyback” off the primary loan. That’s no longer an option.
Underwriters are tightening up on loan-to-value, requiring borrowers to put down at least 5 percent of the home value, and mandating private mortgage insurance if they can’t put down at least 20 percent.
But it has also become much harder to get mortgage insurance, even if a borrower otherwise qualifies for the loan. And without insurance, there’s no loan.
“In the past, if you got a mortgage approval, getting private mortgage insurance was literally a given,” said Brooke L. Anderson-Tompkins, president of 1st Priority Mortgage. “That is no longer the case.”
Second, be prepared to document how much you make. If you’re self-employed and don’t have pay stubs, you may have to present two years’ of tax returns, and if you do state your income, it has to make sense in the context of what you do.
Third, the loan will probably cost more for many people. Fannie Mae and Freddie Mac instituted higher credit-score requirements and “add-on” or “delivery” fees on loans several months ago, even before the government takeover. Those are passed on to borrowers.
Fees are rising
In the past, a borrower could avoid “delivery” fees with a credit score of at least 680 out of 800. Now, the floor is a credit score of 720, and you’ll start paying extra points on your mortgage amount if your score is lower. The fees themselves have also doubled. And the less your down payment, the higher the delivery fee, ranging from one-quarter of a percentage point to as much as 3 points.
Delivery fees could also be charged on cash-out refinance loans, even with high credit scores. Multi-family homes, second homes and rural properties may also incur fees, even when owner-occupied. And mortgage insurance premiums also now increase as credit scores fall.
