Well according to all the news feeds that is the perception of many and that is because we have all been spoiled by the easing up on qualifying for home mortgages since 2004. But in reality we are back to the basics.
Qualifying for real estate mortgages are now back to where they were prior to 2003. Any one applying for a loan had to meet the following criteria:
• Income (proven) that the borrowers made enough money to cover not only the mortgage, but other expenses – such as utilities, groceries, raising children, cars, insurance etc.
• Stated income – are you kidding. Bankers never relied on this data, verification was always required. Under the old guidelines, a borrower could state at all event amount was required to get the loan. As far as I know, state income is gone. If you are able to get a “stated income” mortgage loan be prepared to pay higher interest rates and provide larger down payments.
• 2 Years tax returns and W2’s to validate the income
• Good credit
• Cash for the down payment, prepaids and closing costs – again bank statements or other financial statements as proof.
• Front end ratios had to be between 28 and 30%, back end ratios 36 to 38% (and if everything else was superb sometimes we were able to get approvals with a 40% back ratio).
- Front end ratio – amount of income to cover the mortgage payment and any escrow account – PITI – principal, interest, taxes, insurance and homeowners dues.
- Back end ratio – amount of income required to cover the mortgage and any recurring expenses such as credit cards, alimony, car payments. Ensuring the borrower had enough money left over every month to pay for living necessities.
• Down payments at the very minimum 5%, 20% to eliminate PMI (private mortgage insurance) required by lenders for less than 20% down.
100% financing and in some situations 105% financing was never heard of or the unbelievable low interest rates we are nevertheless experiencing.
The bottom line we are now back to the basics and this is good for all of us – sellers, buyers and bankers. There is a difference in stretching your income a little bit and buying a home way beyond your method, especially with an adjustable rate mortgage. We should all be thankful for the due diligence that is now required to buy a home mortgage.