Phillip Ratliff, a 27-year-old software engineer, is part of a growing class of first-time home buyers that is purchasing in the wake of the financial crisis of 2008/2009. He obtained a 30-year fixed-rate mortgage with a 3.5% interest rate for his four-bedroom house in Seattle, Washington. He put 5% down on the $325,000 loan. Ratliff, who says he has “good credit”, borrowed an additional$15,000 from his 401(k) account to cover closing and other costs.
“There was money out there if you had the credit,” says Ratliff. He adds that finding an affordable first home was the most difficult part of the process because of the overabundance of similar buyers and limited supply of homes and by owner for sale in his price range.
There is a lot of speculation on the direction of the market. With conflicting data, it is hard to predict. However, there is some good news. A February 2013 article from the New York Times reports increased returns on piggyback loans, acceptance of “merely average” loan candidates, and utilization of fewer diagnostics (credit score, downpayment, debt to income ratio) during the loan process. Also, banks are reporting increases in first-lien prime mortgages from that of the first quarter of 2013. Contrastingly, the demand for nontraditional and subprime mortgages decreased from the first quarter. “We were frequently in the position where we could underwrite the loan but we couldn’t find the mortgage insurance,” according to Brian Thielicke of Cobalt Mortgage in Tukwila, Washington. “Now, it’s completely gone the other way.”
Lenders have by no means reverted back to the standards before the mortgage crisis of 2008/2009. However, the average FICO score of closed loans is 743, compared to 756 in May 2013. A report generated by Ellie Mae Inc. a home lender software provider, indicates that the average down payment for a home purchase was exactly 20%, the first time it has been at that level since July of 2012. The percentage of total income borrowers were allowed to devote to debt payments averaged 35%, the highest percentage recorded since June 2012. In addition, the ratio of mortgage loans to refinance loans has been increasing. This reflects buyer confidence as the rate of purchase loans increased from 27% to 32%. These are all signals of a return to less stringent lending practices.
Credit unions like Navy Federal and NASA Federal Credit Union are offering 100% financing in most stable real estate markets. Guy Cecala of Inside Mortgage Finance says “This is all good news for consumers. We are starting to see some loosening, but it’s very specific. It’s just in its infancy now, and it’s not the type of piggyback loans or low down payment loans that we saw before.”
It is important to keep in mind the phenomenally tough underwriting practices the market has been used to for the past few years. Mortgages with 20% down were requiring prospective borrowers to have credit scores of over 720. Only those with exceptional credit scores of over 770 were able to get mortgages with only 5% down. So, while it is easier to get a mortgage as July 2013 approaches, it is important to remember that lending practices are still stringent and that those with a high credit score and low debt to income ratio will find the most success in seeking a loan.