(Written by Bob Ruth)
Each time I first sit down with a potential client, we discuss qualifying for a mortgage, and the 3 main aspects we use to determine whether a borrower can get financing: ability to repay the loan, willingness to repay the loan, and the collateral value of a house which is determined using an appraisal. Each of these is weighted equally and all 3 aspects determine the suitability of a borrower to obtain the financing to buy a property. This is essentially the foundation for buying a home.
You may be able to qualify for the payments and the house is sufficient collateral for the loan, but if you don't have good credit you may not be able to get the mortgage. This is also true if the appraisal is ok and your credit is good, but you lack the income necessary to pay the monthly mortgage payment. Or if income and credit are good but the house does not appraise you will face a problem getting the financing without making some adjustments to either the price, your down payment, or deciding not to buy the property.
The important thing to remember is that all 3 pieces of the pie must be present in order to get financing to buy a house. This has always been the way in which lenders determine whether borrowers will get the financing but the use of these guidelines and lenders abandoning sound underwriting practices helped to lead to the Housing Bubble we experienced in the US in 2002-2007. In the period since the collapse of the Housing Market lenders have tried to return to more effective methods of qualifying borrowers for financing.
This has been viewed by many people in the media and the general public as an overcorrection in Underwriting to standards which are much more restrictive than is necessary. I don't completely agree with this, rather, in my view we have abandoned the reckless lending standards of the past and returned to the basics of sound risk assessment in order to determine who will get financing. It seems to many that we have become much more restrictive, or conservative but that is simply not entirely correct. The lending industry has just returned to the normal way of underwriting loans based upon accepted risk management practices. Let me give you an example:
When I first entered the industry in the 1980's we verified every aspect of a borrower’s credit and income when we did a loan application. At that time the only way to obtain financing was using what was known as Full Documentation. We sent out verifications of employment to the borrowers place of work to verify not only their employment, but also to verify their salary and length of employment. In the height of the housing boom the vast majority of loans were given without verifying any employment or income...these were known as low doc or no doc loans. I came up for another name for them, "what's up doc" loans because the standards to verify the income had become so relaxed.
In addition, the normal credit score for a low doc or interest only loan was 740 as a minimum. By the end of the boom years, 2006, the average credit score for a low doc loan was in the 660-680 range with many lenders offering them for borrowers with credit scores as low as 580 ; so you can see one of the reasons many borrowers are now having difficulty paying their mortgages. Therefore, the new underwriting standards, based upon verification of income and a return to higher credit score requirements, not only makes sense, it is the right thing to do to protect homeowners from getting into more debt than they can afford. And one other thing: the credit score of a borrower is the best, truest, most reliable indicator of how they will pay a mortgage in the future. Remember, your credit is a marathon, not a sprint. If you have been disciplined in the use of credit and paid all your bills on time in the past, there is a great likelihood you will continue to do so in the future. That is what I mean by willingness to repay the mortgage.
I am committed to providing you with the highest level of customer service.
Tim Bray - Working with Bob Ruth has not only benefited my client's but has strengthened my team and helped to make me more successful. I highly recommend Bob to anyone considering a refinance or purchase. I encourage realtors to align themselves with Bob.
Robert H. Ruth| Senior Mortgage Banker | NMLS ID 513243 | Mortgage Banking
Office: 401-789-4441 | Cell: 401-743-4364Posted by Tim Bray on