Vail Daily column: Tide may be turning on tight lending
While some lending guidelines have tightened recently (or will tighten soon) there are a couple of bright spots out there for some borrowers or hopeful home buyers from Fannie Mae and Freddie Mac.
There are two main “new rules” that could make a notable difference for many. The first is for people who have had pre-foreclosure activity, but got it worked out. Pre-foreclosure status means that you were probably 90 days behind on your house payments and the bank filed foreclosure action, but you managed to work it all out and keep your house.
The second is for those who just threw in the towel and signed over the old homestead to the bank because it was worth way more than what they owed, known as a deed-in-lieu of foreclosure.
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Up until now these people (and there are millions of millions of them) were pretty much looked at by Fannie and Freddie Mac (and most portfolio lenders) as rather shady individuals and were not welcome to submit a request for a loan. And to a certain extent, who among us wants to loan money to someone who burned you once before?
But as is the case with many things in the world, time makes for objective pragmatism. It finally dawned on someone at these government agencies that the nation needs more people buying homes to play a key role in keeping the economy moving. And, golly gee whiz, who better to buy a home than someone who once owned a home but lost it, often through no fault of their own.
So in a rare moment of common sense, it was decided in Washington that if your pre-foreclosure of deed-in-lieu was 24 months old, you would be cautiously considered for a mortgage loan.
This opens the doors to millions of people who were shut out previously. In the past a strict seven-year period was called for.
Now another part of the story is that your credit score may still be chewed up a bit, and that may impact your required down payment or loan to value and interest rate, but two years is a lot shorter time than the previous seven years. And you will have to show adequate income and either a down payment or, in the case of a refinance, equity.
New rule for the self-employed
A third “new rule” that is notable impacts the self-employed and commissioned. In some cases, if the individual is otherwise very well qualified for the loan the income part of the qualification can be based on one year’s taxes instead of two. So if you had a lousy year in 2011, but 2012 was better, then we might be able to just use the 2012 income. Previously, we had to average income and if the income showed a marked decline there were more red flags.
In general to qualify for getting by with only one year’s tax returns the property must be your primary residence, you must have a credit score of 740 or higher and have liquid assets equal to 12 months house payments. Generally loan to value for either a purchase or a refinance will be 70 percent, but we might be able to stretch that if you have more compensating factors and if you are one of the above mentioned people with a pre-foreclosure or deed in lieu of then you had best bring two years.
Qualifying for a mortgage gets more and more complicated every day, and you will be well served by making sure you have a very experienced and trusted originator to guide you through the maze of ever changing rules.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.