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The challenges of home mortgages
by AMANDA WINTERS, MARK COUHIG and
Editor’s note: This is the second in a five-part series about the state of real estate in Sequim.
Hayley McComas remembers the good old days.
A senior loan officer with Peninsula Mortgage who has been in the industry since 1997, McComas said it used to be that anyone with decent credit could get a loan. Nothing else needed.
Now, not only do most lenders deny people with a credit score lower than 620, but they also require a lengthy paper trail proving stable and sufficient income, employment and low income-to-debt ratio, she said.
“We joke around that it seems like they (lenders) are looking for a reason to decline rather than approve a loan,” she said.
Good luck to the self-employed and if you’re looking for a land loan, forget about it. Those hardly exist anymore, she said.
Welcome to the new world of lending.
Regulations change the game
Arthur Buhrer started as a mortgage broker with Clift Mortgage, Sequim Home Loans, in Sequim six years ago.
Since 2007, he has seen an increase in the amount of paperwork involved in seeking a loan.
“You used to be able to get a loan based on how much someone deposited in the bank,” he said. Now lenders look at an applicant’s W-2s for the past two years, pay stubs, length of time on the job and all lines of credit.
It used to be common for someone with good credit to state his or her income for a loan and not have anyone question it, he said.
McComas said the loss of stated-income loans hit Sequim particularly hard since there are so many entrepreneurs and self-employed people who are able to write off a big portion of their income for tax purposes.
Additionally, many lenders are requiring bigger down payments than before, making it hard for the average Joe to get a loan, she said.
“We’re having to turn down a lot more people,” McComas said.
Tons of paperwork
Included in the nearly 90-page stack of papers applicants need to fill out to apply for a loan are several forms certifying the applicant is not committing fraud.
Buhrer said it is known that some people will create fake W-2s and pay stubs. Not only is it a federal offense, but lenders need to know people can make their payments.
“They want you to make your payments for 30 years so they can make money on the interest,” he said. “It costs lenders a lot of money to foreclose.”
Buhrer said collecting and processing the paperwork is the most time-consuming part, though sometimes he still can turn around a loan in two weeks.
McComas also sees that lenders are asking for more documentation and proof of ability to pay.
“Not only (do they look at) credit scores, but if you don’t have the right amount of credit lines, most won’t take you,” she said. “They want to see you have open, active, good credit from four lines for at least 12 months.”
The reason for the regulations
When lenders were doling out loans to anyone with a decent credit score, some people jumped at the opportunity to buy their dream houses and forgot to live within their means.
“The joke was if you could fog a mirror you could get a loan,” Buhrer said. “However, it wasn’t really like that. There were just many different creative ways to get a loan and many took the loans for granted and didn’t really respect the value of money.”
For example, some people would get pre-approved for a $1,500-a-month payment and take it, even though that would be 45 percent or more of their pretax income.
“How much money do you have left for groceries or emergencies?” Buhrer said people should ask themselves.
At the time housing prices were inflated so loans had to be big enough to cover them, he said.
“Nobody had any savings for when they lost their jobs or the economy turned,” Buhrer said.
On top of that, people were taking Adjustable Rate Mortgages (ARMs), which kept payments low initially but came with the risk of interest rates climbing based on a variety of indices.
Buhrer said ARMs were risky and came with many warnings.
“Many of those people who didn’t heed the warnings and better their credit or pay down debt have found themselves in a very tight spot when they couldn’t refinance out of the two-year ARM,” he said.
Buhrer is fluent in federal loan programs through the Federal Housing Administration, United States Department of Agriculture and Department of Veterans Affairs.
The FHA loan programs, which are designed to help credit-worthy low-and-moderate income families, require a minimum of 3.5 percent down, he said.
“Just about every property qualifies for an FHA,” he said.
The USDA programs allow the borrowing of up to 100 percent of a home’s appraised value, eliminating the need for a down payment.
“I think they help get people started,” he said of the programs.
Tax credit gives boost
The First-Time Homebuyer tax credit gave the mortgage industry a boost when it needed it, Buhrer said. “It was an igniter.”
Even though there were other incentives to buy a home, such as low house prices and interest rates, having an $8,000 tax credit sometimes could pay for a good portion of the first year’s mortgage payments, he said.
Since it expired in April 2010, he has seen a decrease in loan applicants but people still are looking to buy and he still believes in the value of owning a home, he said.
“If there’s one thing that can’t be stamped out it’s the American Dream,” she said. “And that is to own a home.”