As wounded housing markets across the nation continue to heal, old habits are returning in force.
Just a few years ago, it was impossible to give away homes. Today, bidding wars are breaking out in many places — just as they did before the housing boom went bust.
Americans long have believed that bigger is better. But home shoppers are better off forgetting that mantra, says Tony Ciochetti, executive director and Elmo James Burke Jr. Chair of the Real Estate Finance and Development program at the University of Texas at San Antonio College of Business.
Ciochetti says mortgage lending remains tight, and borrowers with credit problems will have difficulty securing a loan.
However, those who understand the lending process — and who are realistic about what they can afford — still can get their piece of the American dream, he says.
Ciochetti expands on those thoughts in the following interview.
During the housing boom, it was said that anyone who could “fog a mirror” could get a mortgage loan. In recent years, however, it has become much more difficult to get financing. How has this tightening of the purse strings impacted the housing market?
There are a couple of issues associated with the “downturn in the economy” that come into play here.
The first is that credit underwriting has become more stringent, resulting in it being more difficult to obtain mortgage financing. Those with credit history problems — and who may have been able to get mortgage financing in the past — have seen it becoming more difficult to gain loan approval in the past few years.
Secondly, lenders have been stricter on their underwriting of the property, since the property is providing collateral for the mortgage being made.
This combination of tougher underwriting for both borrower and property has made it more difficult for many borrowers to secure mortgage financing.
The good news is that in many parts of the country, residential values have begun to rebound from the lows seen during 2009 to 2011. This has enticed some potential buyers who have been sitting on the fence to decide to re-enter the housing market in order to purchase at what are thought to be relatively good values.
Over the past year, has it gotten any easier to obtain a loan? Or are lenders continuing to be extremely cautious?
Lenders continue to be cautious in their underwriting, which brings us back to the borrower’s financial situation. Income, expenses (both short term and long term), credit history and employment are all factors that lenders will rely upon in making a loan decision today.
The borrower’s ability to provide the necessary down payment (and closing costs) associated with securing the loan are also important factors to consider, along with typical ratios used by lenders to make loans.
For example, lenders will look at the percentage of the mortgage payment and other related expenses (insurance, property taxes, homeowners fees, etc.) in relation to both income and short-term and long-term debt of the borrower.
Which types of borrowers are having the most trouble securing a loan today?
Those with problems associated with the underwriting criteria (as mentioned above), credit problems, high expense ratios, bankruptcy and/or foreclosure histories are more likely to experience problems in securing a loan.
What can people do to improve their chances of getting a loan?
First, better understand the loan process. Meet with a lender to have them explain their requirements and what documents you will be expected to provide or help secure.
Review what you can actually afford to borrow and set your expectations accordingly. Review your credit history and scores and attempt to clean up items on your credit reports that may be questionable or not associated to you. Think about cleaning up your budget and/or ways to take advantage of lower interest rate opportunities for cars and/or credit cards.
Be wary of any “incredible deals,” as history tends to prove that if an offer looks too good to be true, there is likely some catch. An example might include the “teaser rate” mortgage loans that were so popular up until the onset of the financial crisis.
What advice would you have for people who want to buy a home, but just cannot get approved for financing?
Homeownership provides many benefits, but is not the answer for everyone. Assess your real needs, your real budget and your expectations.
As Americans, we are known around the world for our “consumption” of all things bigger and better! Be wary of jumping into something larger and/or more expensive than you can actually afford.
Scale back your budget and look for opportunities in the market. In some cases, sellers may be in a position to provide owner financing, and for those who are handy with tools, a fixer-upper may be a great way to provide entry into home ownership.
As the down payment is often a drawback for many buyers, look to parents and/or relatives who might be able to help out. Learn to set a budget in order to start accumulating funds toward your down payment.
Spend time learning your market and seeing homes that you will likely want to buy, so that when a good deal comes along, you are prepared to act.