How easy is it to get a mortgage?

07.02.09
By Randy Johnson

This is a burning question on the minds of many homebuyers these days, and with good reason. There are enough horror stories floating around that one cannot help but worry, even if you think you have your ducks all lined up.

First, for the overwhelming majority of buyers, the mortgage business today consists of three major players: FHA, Fannie Mae, and Freddie Mac. VA plays a minor role. Although some retail lender – either a bank/mortgage banker/mortgage broker – will originate your loan, all loans will be quickly sold to one of these major entities. Thus it is their rules that predominate and your compliance with those rules will determine if you get a loan.

The first issue is down payment. If you have held off on buying for several years and have been saving money so as to accumulate a larger down payment, like 20 percent, it will be easier on a number of fronts. With a loan of only 80 percent loan-to-value you will not have to pay private mortgage insurance (PMI). Qualifying will be more liberal.

90 percent loans are available too, but you will need to pay PMI. That is roughly equivalent to ½ percent per year. The payment will be spread across the year and added to your monthly payment. Qualifying is harder for these loans. It’s unlikely you will get approved unless your ratio of total obligations to income is less than 41 percent.  

You can also get 95 percent loan-to-value loans if you do not live in an area that is deemed to be a “declining market.” States like California, Nevada, Arizona, Michigan, and Florida are considered declining market states and many areas in other states are included. If you’re curious about specific declining areas, check out the ones that are on one PMI company’s list. 

FHA requires only a 3.5 percent down payment and, if you have only 3.5 percent to put down, you have no other choice. Go for it. The government’s MMI, Mutual Mortgage Insurance premium, is currently at 0.55 percent. And rates are slightly higher too.

The next issue is qualifying. You lender will run your application through an automated underwriting program. If you are deemed creditworthy, you will be approved even if your qualifying ratios are high. With 20 percent down we have seen borrowers get approval who were devoting 50 percent of their gross income to housing expenses and other fixed obligations. That is quite liberal by historical standards.

If you are putting down less, you fall under PMI rules and their rules are stricter. They will want to see your ratio under 41 percent.

FHA may not have many rules. As I hear it, are being very liberal with their qualifying standards. It’s not quite, “If they can detect a sign of life you are approved,” but we hear astonishing stories. This is also a good route if conventional lenders cannot get you approved under Fannie Mae or Freddie Mac rules.

Credit scores are the final piece of the puzzle. Currently Fannie and Freddie will do loans for people whose FICO scores are low, but they really get expensive. For example, a borrower with a 650 FICO score putting 10 percent down will pay an EXTRA 2.25 points compared with a borrower with scores over 740. If you’re curious where you stand, view the Fannie Mae matrix. 

We always encourage people to check their credit scores and concentrate on making improvements if necessary. You can see why when you think that a 100-point difference in scores would mean paying an extra $4,500 on a $200,000 loan to compensate for the additional perceived risk. You can say that it may not be reasonable, but they have the gold and they make the rules.

So is a mortgage easy to get today? It sure is for responsible borrowers who have saved their money, who have good jobs with reasonable income, who aren’t stretching beyond what is reasonable, and who are good credit risks. If you don’t fit this description, I hope that this provides the encouragement to fix the things that need fixing. If you do, the money for a home purchase will be there available to you.

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Responsible borrowers will have no problem getting a mortgage in today's market.