What To Expect From Tighter Lending
Although a lot of blame can be put on the big banks for their lending practices leading up to the bursting of the housing bubble in 2007 (and some would argue continues to drag on into 2010), one thing that banks should not be blamed for is their stricter lending practices.
By being a lot more vigilant in how they lend, banks will be able to help avoid the types of market crashes that have led to so many people walking away from their homes altogether.
But what do stricter lending practices really mean to the average individual who is looking for a mortgage to purchase a new home? Here are three things that borrowers or prospective borrowers can expect to face during their mortgage application process.
1.
Verification of income.
While many reputable lenders already verified income, many did not do so with the diligence required to underwrite sound mortgage loans.
This means that instead of using base salary, they might use base salary, plus year-end bonus, plus overtime, plus, plus, plus! The problem with using all of the pluses is that they are not guaranteed.
Granted, neither is the base salary, but for companies that have survived the recession, their employees are still earning at least that base salary.
While overtime and bonuses might be virtually guaranteed, during periods of financial crisis, they are the first to get cut.
For the borrower, this means they will qualify on less income, meaning the amount of mortgage they will qualify for will be lower.
2.
Approvals based on posted rates.
Rather that using near-zero mortgage rates to derive a payment (such as with an adjustable rate mortgage), lenders are more apt to use posted mortgage rates to derive a payment and ensure borrowers can service the debt based on these higher rates.
With a higher rate, the monthly obligation will increase, thereby pushing down the amount a borrower can repay on a mortgage.
(It should be noted that with rates as low as they are, the impact may not be as severe as many would expect).
3.
Equity and net worth.
The most prudent lenders will want to make sure borrowers have a positive net worth and/or equity that can be applied to their home purchase.
By ensuring there is equity, the lenders will be less "at risk" when it comes to default as well as repossession and sale.
The problem for a lot of borrowers, however, is that a lot of their equity and net worth deteriorated during the economic problems of the past few years, which also resulted in investments being devalued as well.
These three underwriting changes will clearly make it a little more difficult for borrowers to obtain the funds they need to obtain a mortgage.
But for borrowers who trust that their lender is providing sound and reasonable advice (rather than looking out for their own profitability and success), the stricter lending criteria will help.
Most importantly, people who are buying homes today should feel a tad safer knowing that their equity position and home will be safe from future catastrophic housing and economic bubbles.
By being a lot more vigilant in how they lend, banks will be able to help avoid the types of market crashes that have led to so many people walking away from their homes altogether.
But what do stricter lending practices really mean to the average individual who is looking for a mortgage to purchase a new home? Here are three things that borrowers or prospective borrowers can expect to face during their mortgage application process.
1.
Verification of income.
While many reputable lenders already verified income, many did not do so with the diligence required to underwrite sound mortgage loans.
This means that instead of using base salary, they might use base salary, plus year-end bonus, plus overtime, plus, plus, plus! The problem with using all of the pluses is that they are not guaranteed.
Granted, neither is the base salary, but for companies that have survived the recession, their employees are still earning at least that base salary.
While overtime and bonuses might be virtually guaranteed, during periods of financial crisis, they are the first to get cut.
For the borrower, this means they will qualify on less income, meaning the amount of mortgage they will qualify for will be lower.
2.
Approvals based on posted rates.
Rather that using near-zero mortgage rates to derive a payment (such as with an adjustable rate mortgage), lenders are more apt to use posted mortgage rates to derive a payment and ensure borrowers can service the debt based on these higher rates.
With a higher rate, the monthly obligation will increase, thereby pushing down the amount a borrower can repay on a mortgage.
(It should be noted that with rates as low as they are, the impact may not be as severe as many would expect).
3.
Equity and net worth.
The most prudent lenders will want to make sure borrowers have a positive net worth and/or equity that can be applied to their home purchase.
By ensuring there is equity, the lenders will be less "at risk" when it comes to default as well as repossession and sale.
The problem for a lot of borrowers, however, is that a lot of their equity and net worth deteriorated during the economic problems of the past few years, which also resulted in investments being devalued as well.
These three underwriting changes will clearly make it a little more difficult for borrowers to obtain the funds they need to obtain a mortgage.
But for borrowers who trust that their lender is providing sound and reasonable advice (rather than looking out for their own profitability and success), the stricter lending criteria will help.
Most importantly, people who are buying homes today should feel a tad safer knowing that their equity position and home will be safe from future catastrophic housing and economic bubbles.
