April 1, 2013
By Chris Waford, S.V.P Citizens Union Bank, Mortgage Division.
There are many misconceptions going around about how difficult it is to qualify for a mortgage loan in today’s environment. Granted, qualifying for a mortgage loan in 2005 may have been somewhat easier than it is in 2013, but it cannot be further from the truth in believing that getting a mortgage loan today is “too hard” or “impossible”.
Mortgage lenders are approving and closing mortgage loans at a record pace. Low interest rates and consumer demand have propelled mortgage origination to an all time high in recent years, both locally and nationally. Low to zero down payment loans still exist as they did prior to the 2007 mortgage meltdown. Down payment assistance grants still thrive as they did in 2005. Homeownership is more affordable now than any other time in my lifetime. And the means to achieve the homeownership dream is ten times easier then when I purchased my first home in 2001.
So why are there so many misconceptions floating around about the difficulties in getting a mortgage loan today?
In my opinion, much of today’s false perceptions about qualifying for a home loan can be credited mostly to the “snap back” reaction by mortgage lenders in combating the mortgage crisis that struck our economy in 2007 and less to do with any new qualification requirements implemented over recent years. In fact, what I see is a swift return by lenders to the basics of underwriting that existed when I first entered the mortgage business in 1994. These underwriting basics are commonly known as the “3 C’s of Lending”; Credit Reputation, Capacity, and Collateral Position.
Today’s mortgage underwriting philosophy isn’t anything new but rather a revived effort by the mortgage industry to return to traditional underwriting guidelines that put equal weight on all three lending categories when evaluating risk associated in making a mortgage loan. The most crucial thing the mortgage industry learned from the mortgage crisis is that all categories of the “3 C’s of Lending” are vital to limiting exposure from a mortgage loan going into default and no one criteria is more important than the other when it comes to evaluating risk in making home loans. In the years leading up to the 2007 mortgage crisis, lenders moved away from valuing all three lending components equally, but rather valued one or part of the components as being more important than the others. For example, in 2005 a borrower with a great credit score could practically borrow any amount of money regardless if the borrower lacked the necessary income documentation to support their ability to repay the loan. Making mortgage loans strictly on a borrower’s credit reputation while ignoring the borrower’s capacity to repay the debt was reckless lending behavior which fueled part of what led to the mortgage crisis.
Borrowers seeking mortgage financing in today’s lending environment can be well served in having some generalized knowledge about the “3 C’s of Lending” lenders evaluate when reviewing a borrower’s loan application for mortgage financing. There are numerous factors and various degrees of calculations lenders compile and review during the loan process but in the end their main purpose is to determine if a loan request contains an acceptable risk in all three lending components of the “3 C’s of Lending”.
Credit Reputation demonstrates to the lender the borrower’s willingness to repay their mortgage loan by carefully reviewing the borrower’s previous credit history found on the borrower’s credit report. Often the credit reputation is scored by using a numerical scoring module known as the credit score. A borrower’s credit score gives the lender an idea of the likelihood a borrower will default on their mortgage loan by reviewing their current and past credit performance. Statistically, the higher the credit score the less likelihood a borrower will default on their mortgage. Most lenders require borrowers to have a minimum credit score before loan approval will be granted. Typically the minimum credit score a lender will consider is 620.
Capacity calculations are used by lenders to determine the borrower’s means and ability to repay their mortgage obligation in conjunction with their current financial responsibilities. Lenders gather and review income documentation in order to determine if the borrower can afford the payments on the mortgage loan they are applying for. Lenders calculate the percentage of the borrower’s income that will be used to repay the monthly mortgage payment with their current financial obligations, such as car payments and credit card payments. The higher the percentage of income being used monthly to repay the mortgage payment with other financial obligations results in more risk that the borrower will default.
Collateral position is crucial in protecting a lender’s exposure to financial loss in the event a mortgage loan should go into default. A lender carefully reviews the condition of the property, the value of the home, and the amount of cushion a lender may have in the form of an “equity” position. The borrower’s property is typically the lenders last defense in repayment of the mortgage loan if a borrower should default, so it isn’t unusual for lenders to deny loans strictly due to weak collateral positions or inability for home appraisal to adequately support the home’s value. Not all mortgage loans require borrowers to have down payments but those loans typically require mortgage insurance to offset the lender’s lack of equity position.
Understanding the “3 C’s of Lending” and the role they play in receiving approval for a mortgage loan can greatly ease misconceptions about the difficulties in getting a mortgage loan in today’s environment. I will admit that while the mortgage process is somewhat more intensive than it was in years past, the approval requirements are still more flexible than what they were when I first got into the mortgage business in 1994. Lenders today are asking more questions and requesting more documentation from the borrowers than they did a few years back, but as far as it being “impossible to qualify for a mortgage loan today”? That’s simply a myth and could not be further from the truth.