Mortgage Madness

Talk about extremes: In 2006, lenders were falling all over themselves to hand out mortgages. Today, even good credit risks can be out in the cold.

Just how tough is it to get a mortgage? We asked Alex Stenback (right), a mortgage banker with the Residential Mortgage Group in Minnetonka.

What does it take to qualify for the best mortgage-interest rates today?
  Most lenders are looking for a credit score of 740 or above. If you have a 725 score, you can still get the same rate as someone who’s at 740, but you’ll usually need to pay “points” up front to do so, often a quarter of the loan amount.

Debt-to-income ratio standards also have changed. A few years ago, you could be  approved for a conventional loan with a ratio upwards of 55 percent. Now it’s almost universally limited to 45 percent. Income documentation also has become more stringent.

Are banks also requiring larger down payments?Down-payment requirements have gone up, but it is still possible to purchase a home with as little as 3 percent down for a conventional mortgage.

Are FHA loans, historically designed for first-time buyers, growing more restrictive as well?  These loans will be more expensive as of April 6, 2010. To offset the losses the FHA has experienced, mortgage-insurance premiums are going up [from 1.75 percent to 2.25 percent of the loan amount]. But FHA loans remain a good option for first-time homebuyers and others. The down-payment requirement is just 3.5 percent—as long as you have a credit score of 620 or above. Allowable seller-paid closing costs are being reduced from 6 percent of the purchase price to 3 percent.

Has it become more challenging for entrepreneurs and the self-employed to get financing today?  Banks look for two years of tax returns from these groups, which they usually average. What has gone away are the mortgage options in which income isn’t fully documented, such as the low-documentation, no-doc, and other exotic products.

Are tighter lending standards here for the long haul?  As long as delinquencies and foreclosures stay at the same levels or rise, lending will get tighter before it loosens. That said, there is still plenty of hope for those who don’t qualify as ideal borrowers—as long as you have the income to support the loan amount.