toledoblade.com --

HAVING LANDED a sweet deal on a cozy ranch in south Toledo's Beverly Place section and possessing strong credit scores, Edward and Janis Whitson appeared poised this year to sail through the mortgage approval process.

They eventually snagged financing for the $109,000 purchase from Flagstar Bank in Troy, Mich., but not before being rejected by the first lender they approached.

"It's more difficult now to get a mortgage," observed Mr. Whitson, who knows what he is talking about. He is not only a mortgage applicant, but also a home-loan broker.

He ran into problems because, for a time this year, his income dropped steeply when some forms of mortgage financing dried up in the nation's credit crisis.

His income rebounded, but the first lender couldn't get past the earlier income decline. Flagstar green-lighted the mortgage based on more recent pay stubs and his income over the prior two years.

Friday was moving day for the couple, whose new 1,400-square-foot, three-bedroom house was purchased at a 30 percent discount from Lucas County's appraisal.

Experts say the fact that hurdles were put in the way of home-loan applicants with credit scores in the high 700s - 720 is considered strong - is a sign of how the market has changed since the onset of the nation's mortgage crisis.

They add that, although plenty of money is available for home loans, lenders are more cautious about whom they lend to and how big the loans are.

"Money is readily available but the guidelines are a little tougher," said Jack Howard, president of the Mortgage Bankers Association of Northwest Ohio.

Among the changes:

•Nearly all "zero-down" loans - requiring no down payment - have disappeared. Borrowers will need a minimum of 3 percent and probably 5 percent.

•Lenders are placing more emphasis on how much debt like car loans and credit card balances that prospective borrowers hold in comparison to their income.

•Many more home purchases are being financed by the Federal Housing Authority. But if a borrower is seeking more than $271,050 - the limit on FHA loans - he or she will have to bring more cash to the table.

•Home buyers seeking "jumbo loans" of more than $417,000 should expect to pay at least 1.5 percentage points above conventional rates, a higher amount than required previously.

•A strong FICO credit score of 720 or higher carries more weight than ever but doesn't mean instant approval.

•Borrowers seeking conventional financing with a down payment of 5 percent and credit score of 660 to 679 will typically be assessed "one point," or 1 percent of the loan balance. That amounts to an up-front fee of $1,000 on a $100,000 loan.

•Financing condominium purchases has become more difficult. Many borrowers who are unable to obtain FHA financing will have to make a 20 percent down payment. FHA won't lend for purchases in complexes where fewer than 51 percent of units are owner-occupied.

Developer Kevin Romanko, of Sycamore, Ohio, has seen firsthand how things have changed.

He had high hopes for Argyle Forest, a 66-lot subdivision off Tracy Road in suburban Lake Township dominated by modest ranches designed for first-time home buyers and empty nesters that he calls "starters and finishers."

The first 13 houses sold quickly. Then about a year ago, activity screeched to a halt. He hasn't sold a home since.

The region's economic woes are a main reason. But there is another factor: the mortgage market.

"We've had numerous opportunities where the buyer couldn't get approved for financing," Mr. Romanko said. In one instance recently, the lender was demanding a 680 credit score but the would-be borrower came in at 650.

"Lenders are crossing their t's and dotting their i's," observed Rick Popiolek, an agent at the Briarfield office of Danberry Co. Realtors, who handles sales for Mr. Romanko.

"From what I see, 720 is the magic number," he explained. "If your credit score is above that number, you get just about everything. If you are under, you have to work at it."

Because of the changes, Mr. Popiolek has modified the way he responds to prospective buyers who want to start hunting for homes. First, he asks them to consult a lender to verify that they will qualify for a loan. "Then I start showing them houses," he said.

Although business has declined at Sylvania Township's Forrester Wehrle Homes, which is among the largest builders in the Toledo area, availability of mortgage financing is not a major factor, said Jeff Wehrle, president.

He conceded, however, that many lenders have toughened terms. His firm sometimes provides temporary financing for customers whose banks won't lend until the home construction is done or demand 20 percent down payments for construction loans.

Mortgage rates remain favorable. They slipped last week to an average of 6.04 percent on a 30-year fixed-rate loan from 6.14 percent the week before, mortgage giant Freddie Mac said.

Zero-percent loans have largely disappeared, although military veterans can still obtain 100 percent financing through Veterans Administration loans.

For most buyers, the smallest down payments are available on FHA loans.

The rate is often quoted as 3 percent, although it is actually 2.25 percent, said the president of the local Mortgage Bankers Association.

The discrepancy arises from the fact that the buyer is required to contribute 3 percent to the transaction, which can include closing costs. The figure will rise to 3.5 percent Jan. 1.

FHA loans make up about a quarter of all mortgages, up from 3 to 5 percent before the current trouble, said Mr. Howard, who is a loan officer with Savage Mortgage Services in Toledo.

Because most places in northwest Ohio are classified as areas with declining home values, 5 percent is typically the lowest down payment on conventional mortgages, he added.

Under rules of Fannie Mae and Freddie Mac, the government-controlled entities that underwrite most conventional loans, points are assessed if the borrower's credit score falls below certain thresholds.

In some circumstances, that assessment can rise to 3 points - for an up-front fee of $3,000 on a $100,000 loan - for a person with a credit score below 620.

Also cracking down are providers of private mortgage insurance, which is usually required on conventional loans when the down payment is smaller than 20 percent.

Insurers are reluctant to issue policies on investment properties and condos. That can mean that the borrower must put 20 percent down, Mr. Howard said.

Conventional loans top out at $417,000. Anyone needing more must seek a so-called "jumbo loan" in the private market. "Right now, jumbo financing is very expensive," Mr. Howard said. Before the mortgage crisis, borrowers paid about 0.25 percentage point above conventional rates. Now, the spread is typically 1.5 percent.

Also changed are many lending practices that have been blamed for helping spark the mortgage crisis.

"Stated income" loans, for which lenders approved funds without verifying wage claims, have disappeared.

Congress, in reforms enacted in response to the current crisis, outlawed a scheme that essentially allowed sellers to finance the buyer's down payment. The seller made a contribution to a charity, which in turn gave the money to the buyer for the down payment.

Despite the changes, broker Jim Loss, of Loss Realty Group in Toledo, said: "There is no problem getting financed if you have good credit and money to put down."

The appraisal process is more complicated, but there are seldom problem with appraisals coming in under the agreed selling price in the current buyer's market. "Homes are being sold at such low prices," he said.

Contact Gary Pakulski at:
gpakulski@theblade.com
or 419-724-6082.

Permanent Link