Mortgage Lending Requirements Easing Up?

Getting approved for a home loan isn't getting easier, but it doesn't appear to be getting much more difficult, either.

In its quarterly survey to member banks, the Federal Reserve asked senior bank loan officers whether "prime" residential mortgage guidelines had tightened in the last 3 months.

Nearly 50 percent of banks said guidelines tightened last quarter, a much lower figure than during all of 2008 and a signal that mortgage lending may be turning a corner.

Guidelines remain restrictive, however.

Versus 18 months ago, lenders subject would-be borrowers to all of the following:

* Higher minimum credit score thresholds
* Larger minimum downpayments
* Lower debt-to-income requirements
* Mandatory fees based on certain loan traits

In addition, the availability of subordinate financing has all but disappeared when a home's loan-to-value exceeds 80 percent.

Combined, these changes preclude a lot of Americans from getting access to today's low rates but that could change in the coming months if the Fed's reported trend continues.

Some experts believe that credit tightening started the recession. Credit loosening, therefore, could help lead us out.

Are Mortgage Guidelines Easing Up?

If the unfreezing of credit is paramount to an economic rebound, the first signs of a thaw may be here.

Monday, the Federal Reserve released its quarterly survey of 84 member banks. In it, the Fed says that fewer than half of its responding banks tightened "prime" mortgage guidelines over the last 3 months.

This is good news for active home buyers and others wanting a new mortgage.

"Prime" is a vague term with respect to home loans, but it usually refers to mortgage applicants who can document:

* Equity or downpayment in a home
* Credit scores over 740
* Excessive income versus debt

In looking at the Fed's survey, we can infer that because less than 50% of banks made credit less available, more than 50% did not.

Borrowing may not be easier for prime borrowers, in other words, but it's not harder, either.

Count this as a small victory for the housing market.

All of this said, however, guidelines remain restrictive.

In the 12-month period beginning late-2007, banks continuously clamped down on low credit scores, low downpayments, and high debt-to-income levels. In addition, Fannie Mae added new fees based specific loan traits and second mortgages practically vanished from the marketplace.

The cumulative outcome of these actions precludes many Americans from participating in the current Refi Boom. However, if the trend reported by the Fed continues, lending may open up a bit later this year, providing a boost to housing and to the economy.

Experts believe that the tightening of credit helped create this recession. The loosening of credit, therefore, may be the way out.

Move Up Home Buyers Beward - New Lending Challenges Coming Soon

When a homeowner sells his home and decides to buy a new one, there are 3 basic options for the residence -- sell it, keep it, or rent it.

Unfortunately, no matter which path they choose, move-up homebuyers in need of a new conforming mortgage will find qualifying for a home loan to be more difficult this season than in the past.

Mortgage guidelines are dramatically tighter for people "carrying two mortgages".

Among the changes this spring's buyers face:

Selling the primary residence. If you plan to close on your new home prior to the closing of your existing home -- even if it's only by a day -- both payments must be listed as monthly debts on your mortgage application. This will disqualify the majority of homebuyers.

Converting your residence to a second home. If your current home has less than 30 percent equity in it, your mortgage application for the new home will not be approved unless you can show 6 months worth of mortgage payments + taxes + insurance in reserves for the current home and new home combined.

Converting your residence to an investment property. If your current home has less than 30 percent equity in it, any rental income derived from a tenant is disallowed on your mortgage application for the new home. You must still count the mortgage payment + taxes + insurance as a monthly debt.

In other words, being a move-up buyer isn't as simple as it used to be. New lending rules make buying a new home an exercise in timing and financial planning. And the rules are expected to get tougher, too.

Therefore, if you expect to be a move-up buyer in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead for it.

Understanding the new mortgage landscape and how they can influence your upcoming purchase may be the difference between getting approved for a home loan, and getting turned down.

Fannie Mae's Dying Act: Maximum Property Restrictions for Real Estate Investors

For owners of investment properties, the mortgage market has just become uglier.

In its last act as a semi-private company, Fannie Mae updated its lending guidelines Friday, this time slapping new restrictions and additional fees on income-producing properties.

Most noticeable is Fannie Mae's new, 4-property limitation. They followed in the same footprints of Freddie Mac, who instituted the policy a couple of months back.

Based on the new rules, second home and investment property applications will be denied in underwriting if the mortgage applicant has, or will have, more than 4 properties financed in total.

The former guidelines allowed for 10.

However, Fannie Mae has also clarified what it means to "own" a property, creating a loophole for real estate investors. Fannie Mae no longer considers a property "under ownership" if the property is held in the name of a corporation -- even if the borrower is the sole owner of the corporation.

Real estate investors, therefore, can place their properties into an LLC and not be subject to Fannie Mae's 4-property limit. Most real estate investors do this already for liability and taxation reasons, but now it's a good idea for mortgage approval reasons, too.

The other change from Fannie Mae does not have a loophole. It's a set of new, mandatory loan fees, specifically assigned to investment property mortgages.

Loan-to-value less than 75 percent : 1.75% loan fee
Loan-to-value 75.01-80.00 percent : 3.00% loan fee
Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These new charges are separate from, and in addition to, Fannie Mae's already-costly loan-level adjustments. Add the two together to calculate the total "mortgage fee".

And, lastly, there's the Fannie Mae changes for "Accidental Investors" -- mortgage applicants that couldn't sell their primary residence and, therefore, converted it to a rental.

Fannie Mae's new guidelines restrict owners of converted property from using its rental income on a subsequent mortgage application. If the converted property's equity is less than 30 percent of the home's value, the entire monthly housing payment must be shown as a monthly income loss.

If the equity exceeds the 30 percent threshold, owners can use 75 percent of the rental income to qualify, and must also show 6 months worth of housing payments in reserves for both the rental property and the upcoming home purchase in order to qualify.

Now, long-term, it's unclear whether the government's Fannie/Freddie takeover will lead to a reversal in the mortgage guideline tightening we've seen this year, but it's sure done a good job in bringing mortgage rates down.

However, as owners of investment properties are finding out, low rates only matter if you can qualify for them.

Mortgage Guidelines Getting Tougher for All Borrowers

It's not your imagination -- getting approved for a home loan really is becoming more difficult.

Taken from the Federal Reserve's quarterly survey of 84 banks, it illustrates the changing dynamic of mortgage guidelines.

Most notable is the steep curve for "prime" mortgages, a type of home loan given to applicants exhibiting:

* A well-documented credit history
* High credit scores
* Low debt-to-incomes

Americans have come to expect sub-prime loans to be tougher, but it's the sharp tightening of prime guidelines that shows us that nobody is exempt from the newly tightened underwriting guidelines that banks are exhibiting right now.

If you plan to buy or refinance a home over the next year, consider a popular expression in financial circles -- the trend is your friend.

Know that mortgage guidelines will get tougher before they get easier and applicants on the brink of being approved today will almost certainly be denied a mortgage three months down the road.

Owning real estate and making sound financial decisions requires a fair amount of advanced planning. Sometimes, looking at the past is a prudent way to prepare for what's coming ahead.

According to the Federal Reserve's survey, what's coming ahead is more scrutiny and tightening standards.