Over the last year mortgage qualification has become increasingly harder. Two new changes go into affect next week which will ratchet loan approvals a little tighter still.

One is a change that only affects mortgages here in Illinois. Senate Bill 1167 will become law as of June 1^st. This law is aimed at predatory lending and the problems caused by sub-prime loans. It restricts the types of loans available, requires home buyers counseling for home buyers in Cook County who are taking out specific types of loans, and it requires more transparency so the consumer knows exactly what they are getting when they enter into any mortgage financing. There are some good features in this bill, but most of what they are legislating against has already gone away due to market forces in the mortgage market. Sub-prime loans have been a big problem and there is no question that they were abused. But there is no such thing as a sub-prime mortgage now, so this bill is coming too late to make any real impact.

The one part of this that is going to hurt some is that stated income loans will no longer be available in Illinois. Stated income loans were loans which didn’t verify the borrower’s income, but took whatever was stated as the Gospel truth. As you can imagine, this was a license for abuse, and there were way too many borrowers who bought homes with no idea how they would pay for them. That said, stated income loans do make sense for well qualified borrowers with complicated tax returns – self employed borrowers. These loans, like so many others, have been disappearing over the last year. The guidelines in the law are somewhat vague as to what is considered stated income, but the lenders who were offering this program are taking the cautious path, and are withdrawing from the market. It looks like this will be the final nail in the coffin for any loans that don’t verify income, which means it will be harder for self employed borrowers to qualify for a mortgage.

The other big change is that Fannie Mae brings out their new version of their automated underwriting system, DU 7.0. Most conventional loans are approved through the automated underwriting system, so this will have a huge impact on how loans are approved. On the good side, this version does away with the declining market policy. Last December, in a reaction to the down turn in the housing market, Fannie Mae came up with a plan to identify markets where the prices were falling, and require a higher down payment in those areas. The plan basically made it harder to get financing in the areas that needed it most, and was not a popular move. So getting rid of this plan is a step in the right direction. It will be looked at as a bigger step if the mortgage insurance companies follow the lead and stop their declining market policies, too. The rest of the changes in version 7.0 are not going to be positives for mortgage borrowers. Some of the changes include:

• Borrowers must wait a longer time after a bankruptcy or foreclosure before they can get a mortgage again, and when they are ready they will need a higher down payment and a better credit score.
• Debt to income ratios, that is how much debt you are carrying, will be much lower.
• Condos will now be considered riskier, and harder to approve.
• Having mortgage insurance on your loan will not reduce the risk of having less than a 20% down payment.
• ARMs will be considered riskier than fixed rate loans.

There’s more, but the bottom line is that this is a way of tightening more, and some borrowers who will qualify for a loan today, may not next week.

Illinois Mortgage Rates and News

In the mortgage industry, the present is looking more and more like the past. Back in 1992 when I first got into the mortgage market, George Bush was finishing his last year in office (though he didn’t know it at the time), a Clinton was running to take his spot and Brett Favre had just been picked up by the Green Bay Packers. A lot has happened in between, but another George Bush is finishing his time in the White House, another Clinton is running for president and now that Favre has finally retired he is threatening to un-retire and continue his reign of terror against our beloved Chicago Bears. In the mortgage industry the future is looking a whole lot like the past, too. Back when I first started there were two types of loans which covered the majority of lending options – conventional and FHA. Conventional mortgages were for those home buyers who had strong credit and a good down payment. FHA was for everyone else.

Back in the day, we put together loan packages which highlighted the strengths of the borrower, and showed that they met all the guidelines in regards to credit, income, job stability and having enough money to close, as well as a full detailed appraisal. With changes in technology and a strong national real estate market, mortgage underwriting loosened up a lot. The credit score became the biggest factor in the approval process. With a high FICO score lenders would overlook weaknesses in other areas. It got to the point where some of the biggest wholesale lenders were doing most of their business taking on loans where the borrower stated their income and assets without proving the figures were true. (Even the appraisal guidelines loosened and many loans were approved with just a drive by appraisal, or a computerized estimate of value.) These loans were sold as a way for well qualified borrowers to cut down on their paper work and to streamline the loan process. Unfortunately, this opened the way for abuses and led to “Liar’s Loans”, and some people who bought way over their heads, and couldn’t afford to make their payments.

It wasn’t until property values declined (not so much here in the Chicago area, but very sharply in some areas of the country) that the abuses in the system really showed. When home prices were moving up borrowers found a way to make the payment, even if it was by borrowing more against their home. Now loan defaults are up and mortgage lenders have found that old time religion again. This means we are back to the old ways of doing things, tighter underwriting for everyone, and FHA is again the best option for many borrowers and first time home buyers.

So what can you do if you are planning on buying a home or refinancing your mortgage and you want to make sure you present your self in the best light? Here are a few things you can do ahead of time to improve your chances of getting a loan at the best rate and terms:

1. Focus on your credit – One thing that hasn’t changed is that your credit score and your credit profile are still a crucial part of the loan approval. Make sure you review your credit before you need a loan. If you have problems, work on them when you still have time to get them fixed. Here is a series on credit that will help you understand your options, and show you how to increase your credit score.

How to understand and improve your credit score-part1

How to understand and improve your credit score-part2

How to understand and improve your credit score-part3

How to understand and improve your credit score-part4

2. Address problems up-front – If you have had problems of some type in the past, don’t try and hide them. In the mortgage process we look into all the information you present and verify everything. But some things that you may think are huge problems we may be able to work around. For example, if you have credit problems from the past that are hurting your credit score, FHA can still be an option. The key here is to show that you have moved beyond these problems and they are no longer an issue. To show this you will need to write a letter addressing any credit problems that show up on your credit report. In the letter you need to explain what happened, what you have done to correct the situation and why this isn’t a problem anymore. If you have any documentation to help your case, provide it. The same applies for other problems like job gaps and

3. Put together your documentation – The days of the no-doc loan are gone, so you will need to have documentation proving you make enough income to afford the mortgage payments and you have enough money or other assets to pay for the down payment and closing costs. This usually means putting together some simple documentation. In some cases we can get by with less, and in others we will require more, but this is a good list to start with -

W2s for the last 2 years (in some situations we will need full tax returns),

Your pay stubs for the last 30 days

Bank and investment statements for the last 60 days with all pages attached.

4. Have a plan – Do you know how much of a payment you can afford? Do you know how much cash you can come up with for a down payment and closing costs? There are still ways to buy with little or no down payment required, and there are ways to buy with no closing costs. If you have money to put down, where is it coming from? Will you still have money left over afterwards for other purchases or emergencies? You need to think about these things before you look for a home and applying for a mortgage. The answers to these questions will help you to decide what to look for and how you will finance it.

5. Get pre-approved for a mortgage – With all the changes in the mortgage market this step is crucial. A mortgage pre-approval will tell you how much of a loan you can qualify for and how much of a home you can afford. A good loan officer will take it a step further and help you to figure out the best way to structure your financing so it meets your long and short term needs. And if there are any problems, a good loan officer can also give you advice on how to put yourself in the best position to buy a home, if not now in the future.

The mortgage industry might have gone back to the past, but if you make a plan and follow through, there could be a new home in your future.

Illinois Mortgage Rates and News

Chicago, IL - The first installment of this series,  How to Understand and Make the Most of Your Credit Score – 1,  gave an overview of the credit system, and how good credit is more important than ever before for qualifying for a loan and getting the best interest rate. This installment we will go over Fico scores, one of the biggest factors in qualifying for a loan.

Your credit report contains a good deal of information but most lenders focus on one feature, the FICO score. The name FICO is short for Fair Isaac Company, the firm that developed it. Actually, there are 3 FICO scores, one from each repository, but we generally use the middle score. This score is a computer model that weighs the overall risk in your credit profile. The idea behind credit scoring is to measure the likelihood of a customer’s defaulting on a loan.

Credit scoring goes a long way toward taking the human out of the approval process and making the system more automatic. There are some big advantages to this. Because of credit scoring you can go to the local mall, apply for a credit card and automatically be approved for financing. It works the same way with mortgages. This is how we can offer same day full pre-approvals.

Fico scores range from a low of 350 to a high of 850 (the higher the better), but it’s rare to see scores at either extreme. Most people’s scores are in the 600s and 700s. Mortgage approval depends on other factors besides credit, but a high credit score will go a long way toward helping your situation. With risk based scoring you will need a score over 680 to get the best rates and pricing. If you are in the low to middle 600 range there are still options. If your credit score is below 620, you will have a harder time getting approved and the interest rate will be higher. The options available for those with scores below 600 are slim. Not so long ago Sub-prime mortgages filled this niche. Now your best option is to work on improving your score early.

Because your credit score is so critical to qualifying, it is important to check your credit early in the process, before you’re ready to even start looking for a home. This way if there are mistakes or problems, you have time to work on the credit and improve your scores.

There are five major factors that make up your credit score. These major factors are broken down into hundreds sub-factors, and how you measure up against all these factors is boiled down into your score. One thing to be aware of is that formula for the scoring changes regularly. This is meant as a way to measure the risk of default, so if new risk items show up in their reports, you can bet that the scoring will change. Lately I’ve seen scores vary more than usual, so my guess is they are adjusting the formula at the same time they are tightening the underwriting.

Here are the 5 factors, listed in order of importance:

Payment History: 35% impact. This seems obvious, but if you pay your bills on time it helps your score. Late payments, judgments and charge-offs can kill your score. If you miss a large payment it will hurt your score more than if you miss a low payment. Late payments from the last 2 years are more of a problem than older delinquencies.

Outstanding Credit Balances: 30% impact. This is a surprise for many people. You can have a perfect credit history and still have a poor score if your balances are too high. What they’re looking for here is how many accounts do you have open, and how high the balances are on the accounts. If you owe a lot of money on a lot of accounts, this is a risk that, in the future, you’re more likely to make your payments late, or not at all.

Your outstanding balance compared to your available credit limit is the issue here. If you are near your max credit limit it hurts your score. If you go over the max limit your score will take a big dive, because now not only is your balance too high, but you are now considered in default of the loan.

The less available credit you use the better. It helps your score if you spread your debt around several cards. Your score improves if you drop your balance below 50% of your limit, and it is best if you use no more than 30% of your available credit limit.

Credit History: 15% impact. How long have you had credit established? How long has it each account been established? And how long has it been since you’ve used the credit line? If you have a long history this will help your score.

Type of Credit: 10% impact. You lose points if you have nothing but credit cards. A mix of auto loans, credit cards, and a mortgage is ideal.

Inquiries: 10% impact. Every time you apply for credit it shows as an inquiry in the credit repository. Inquiries can lower your score because applying for more credit means you may be taking on new debt.

The credit report shows the number of inquiries that have been made on your credit history within the last twelve months. Each inquiry can cost as little as 2 points, and as many as 50 points against your score. If your credit score is high, the inquiry won’t affect you much at all. But if your credit score is lower, new credit is looked at as a big problem, and can bring your score down by as much as 50 points.

Also, if you’re about to buy a car or apply for a mortgage and have your credit run several times, make sure you do it all at once. It only counts as one inquiry if they’re all done in a 14 day period.

These scores are calculated by a computer that’s not taking any personal factors into consideration. When a credit report is generated, it’s simply a snapshot of your credit profile for that particular moment in time. Scores change, sometimes by large amounts in a short period of time. To make sure you don’t have a problem when you’re ready to buy, it’s important to have a loan officer review your credit and make sure you are on the right track.

I’ll have more tips on how to best use your credit in the next installment here at Illinois mortgage rates and news.

Here are the other installments in this series:

Part 1 - How our Credit System Works

Part 3 - 10 Ways to Raise Your Fico Scores and Improve Your Credit

Part 4 - Fixing Mistakes and Cleaning Your Credit Report

Illinois Mortgage Rates and News

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