Approvals Are Getting Tougher

Plan Ahead For Your Mortgage Needs-
Lenders are Tightening Up on Approvals

You have probably been aware over the last few months that many lenders who specialized in the sub-prime lending markets (loans made to borrowers or on properties that present more risk to the lender, also known as "B" and "C" lending) experienced sizable losses and were forced to close their doors.

Many times, these sub-prime lending operations were owned by larger financial companies, and the losses rippled through to the more profitable lending operations. Whenever lenders go through this part of the business cycle, they analyze what contributed to the losses and seek to make corrections.

As such, the lenders that are continuing in the sub-prime markets are restricting the scope of the lending programs from what they were even three to six months ago. They seek to limit their risk by not granting loans to as large a percentage of the value of the home as they did before. For example, where they would make a loan to 100% of value, they are not limiting the loan to no higher than 95% of value.

They can also limit their risk by requiring higher credit scores than they used to. It has not been uncommon to see programs that used to require a score as low as 620 now have a higher threshold at 640 or 660.

The underwriting guidelines have also been tightened in some cases by requiring more in the way of cash reserves after closing than they previously required. In the past, some programs wanted to see that the borrower had 2 months of mortgage payments in their bank accounts at the conclusion of the transaction. Now we are seeing requirements up to 6 months of mortgage payments.

In some cases, the lenders combine these changes to really restrict their risk. Whereas six months ago, we may have been able to get 100% financing with a 620 credit score and 2 months of mortgage payment reserves, the conservative lender may limit the loan to 95%, demand a score of 660, and require cash reserves of 4 months of mortgage payments.

As you can see, this would put a borrower who purchased under the more liberal terms a year or so ago, who was planning on refinancing into more favorable interest rates or payments, in a serious bind. The exit strategy that they had carefully crafted was removed by the changes in the guidelines as a result of the losses that the lenders had experienced.

Even though these examples were primarily dealing with the sub-prime lenders, the fact is that the prime lenders ("A" lending) also are going through tightening so that they don't start experiencing losses in the same way that the sub-prime lenders did.

The ways that "A" lenders have been attempting to reduce their risk include the increase of the minimum credit score threshold, and not being as aggressive on the percentage of loan in relation to the value of the home.

On refinances, they are also limiting the amount of cash that a borrower can receive through the transaction, and being less generous on loans on investment properties and condominiums. These categories - cash out, investment properties, and condominiums - all represent additional layers of risk to a lender and they are doing their best not to accept a lot of exposure to these risks.

The important point that I want to impart to you with this edition of my newsletter is that you should not think that everything is business as usual. Many times borrowers will wait until the last minute thinking that there have not been any changes, and that the application process will go as smoothly as it has in the past, or that the loan programs will continue without limits to their availability.

If you, or someone you know, has a loan that is scheduled for an interest rate or payment reset soon, let's have a conversation right away to make sure that we can do the best possible job of getting things taken care of.

This is truly one of those times that it is better to act sooner than later.