Why I’m Mad at the New York Times and their view of the Mortgage World…..

Here is an article where i disagree with the author. If you read the entire post, you will see that the New York Times wrote an article detailing just how difficult it is to get a mortgage now days. The author of this post strongly disagrees with the times. But as a mortgage professional myself since 1999, I have to say that I think The Times is right on the money here.

You read and you decide.

Here is the post:

I read this article over the weekend and it was so full of inaccuracies and distortions that I had to share my perceptions on it.    My comments are in bold and italics…..  and I’ll have more at the bottom.

Tight Mortgage Rules Exclude Even Good Risks – NYTimes.com

Inna Komarovskaya was ready to do her part to revive the economy: She found a “really cute” condo to buy.
Despite a good credit score, a six-figure income and an ample down payment, Dr. Komarovskaya, a recent dental school graduate, could not get a loan. Her mortgage broker told her she ran afoul of new rules requiring two years of sufficient tax returns from some home buyers, instead of only one……

Tom here – the way they say it makes it sound like they are randomly saying, “we need two years tax returns rather than one.”   Let me tell you the details that I “know” they aren’t putting in the story:  Dr. K recently graduated from dental school and then, rather than going to work for a practice with a guaranteed salary, either started her own practice or bought into a practice where she has an ownership stake in the practice.   Because of her ownership interest, the mortgage market is going back to what they have required for years which is a 2 year history to verify income.    Is that a new and restrictive guideline?   Nope, it’s going back to the way things have worked for a very long time.

The recession is the major reason sales are dragging, of course, but it is not the only one. As Dr. Komarovskaya found, buyers once viewed as perfectly qualified are being denied mortgages……

The credit pendulum is stuck at ‘stupid,’” said Lou S. Barnes, an owner of Boulder West Financial Services, a Colorado mortgage bank. “I am turning down loans every day that my grandfather in his Ponca City, Okla., savings and loan in 1935 would have been happy to make. And he was tough.”………
Tom here – I’d like to talk to this Lou Barnes and find out what his customer baser is like.   Am I talking to customers on a daily basis who can’t do what they want to do?  Yeah, I am.   But why?  Not because the guidelines are too tight, but because the bubble burst and property values have fallen.   It’s not stupid lending to refuse to do a “secured” mortgage at 130% of the value of the property.

The denials are occurring for a wide array of reasons: the buyers’ incomes are adequate but irregular; they are self-employed and take many deductions, reducing the taxable income on which lenders focus; their credit scores are below the cut-off point, which has been raised drastically; their down payments are less than 20 percent……
Okay, I think I can disagree with a lot of things in this sentence:

• Adequate but irregular – Gee, hasn’t the mortgage world always (as in like since I was in 1st grade?) taken a 2 year average to deal with irregular income?   So what’s the problem now?   The problem now is that too many people are used to dealing with mortgage rules that allowed virtually anyone to get a mortgage.   Those days are over.
• Self employed and take many deductions, reducing taxable income:  This one has bothered me for a long time.    For many many years, well educated lenders have known that true non-cash writeoffs that self employed people take on their tax returns can be added back to their income.    The cash expenses – well, guess what “cash expenses” means?   It means that you actually paid them.   Now some of you are probably saying, “But I write off the payments on my car loan, so why should that penalize me?”   A couple of things about that:    1) If you are writing off  your car loan and doing it appropriately, you should have absolutely no issues providing enough documentation to your lender so that while you can’t count it as income, at least you don’t have to have it counted as a liability.   2) If you structure things in such a way that you can use “pre-tax” income to pay for personal expenses, then you end up not having the same amount of income to qualify for a long, but employees don’t have that option.
• Their credit scores are below the cut-off point, which has been raised drastically;  Yeah, the cut off points have been raised drastically for credit scores.   Why?   Because the people with lower credit scores are a large amount of the people who are delinquent on their mortgages.   But guess what?   Through FHA, we’re still doing doing mortgages for people with credit scores down in the lower 600’s.   So, if someone has a credit score that’s too low for an FHA mortgage, then yes, they areally shouldn’t be getting a mortgage.
• Their downpayments are less than 20%.   Have the PMI companies instituted what are called “restricted markets?”   Yes.   What does that mean?  It means that if you are located in a restricted market, you have to come up with an extra 5% down.   Take the state of Michigan for example.   We are, according to some PMI companies, a restricted market, so rather than being able to do a 5% down conventional mortgage, we’re limited to a 10% down mortgage.    Oh, and how about FHA and VA?   According to what I’ve read, FHA and VA are in excess of 30% of the entire market.   So, there are a lot of options without 20% down.

Fannie Mae, the government-controlled company that buys mortgages, is so dominant in the lending market that its rules set the standard. It recently toughened its policies, saying it would count only 70 percent of the value of stocks and mutual funds when calculating a buyer’s assets. Previously, that figure was 100 percent…….

Mortgage brokers say those who are being rejected for loans are often entrepreneurs who are used to taking risks. “They are chomping at the bit to get into this market, but are forced to the sidelines,” said Stuart Fraass of Guaranteed Rate Inc. “If you’re self-employed, you have virtually no chance of getting a mortgage now.”……..
If you are self employed, don’t claim all of your income, write off a lot of personal expenses as business expenses, haven’t been in the business for at least 2 calendar (tax return) years, yes, you’re going to find it challenging to get a mortgage now.   But if you are self employed, are showing a profit and are reasonable about what you want to borrow, you should be good to go.   If that applies to you and you are having troubles getting financed, call me.

Mr. Fraass was unable to help Raghbir Singh, a real estate investor who owns a gas station in Dover, N.H. Mr. Singh tried to buy a $301,000 house for himself and his family with 10 percent down and excellent credit, but was rejected. “It was unfair,” Mr. Singh said. “I’m a good risk, but I’m forced to rent.”

A couple of things about this story that don’t “line up.”   Let me explain:   1) Mr. Singh is a real estate investor who claims that he’s “forced to rent.”   What’s up with that?   2) I’d be willing to venture that Mr. Singh’s tax returns don’t show quite the same income amounts that he’d like to “tell you” he makes.  3) “I’m a good risk?”   Didn’t we get away from the borrower underwriting (stated income loans) because they performed so horrendously?

Members of Congress are proposing to extend and enlarge an $8,000 credit for first-time buyers, which is due to expire in December. One bill would extend the credit to all buyers through next June. Another would extend it to all buyers through 2010. A third bill would expand it to $15,000 for all buyers.

Some economists, noting that tax incentives helped stoke the boom, say these proposals should be shunned. “When do you decide enough is enough?” said the housing consultant Ivy Zelman. “I don’t want to feed the drug addict with more drugs.”

Okay, a couple of additional thoughts to wrap things up:

• In case  you can’t tell, this sort of “half story” journalism really bothers me.    Is the mortgage world a lot harder than it was 3 years ago?   Absolutely.    But don’t tell lies and fabrications and half truths that make it seem worse than it is.
• Can people still get a mortgage?   Absolutely!   If you have a downpayment (as little as 3.5%), verifiable and stable income, are looking at buying a house that is reasonable for your income and debt levels and have decent credit, you’re good to go.
• This is exactly why I wrote my book, “Straight Talk About Mortgages – How to Survive and Thrive in Today’s New Mortgage World.”
  
• The world already believes the mortgage industry is dead.   It’s not and we don’t need irresponsible stories and half truths making it worse.

Are Housing Prices Finally Stabilizing?

Bloomberg is reporting this morning that einmonth. They take this as a sign the the economy is beginning to level off. But consumer confidence has sunk a bit and the most experts agree that we will have what is known as a jobless recovery as far as the recession is concerned.

For more info, you can read the full story here.

Debt To Income Ratios

Debt To Income Ratios

Your debt to income ratio is simply a measurement to determine how much of a mortgage you can afford. The number is arrived at by deviding all of your monthly debts (including your total housing expense) by your gross monthly income.

Qualifying Ratios

It is important to know what your debt income ratio will be. If it is too high, you will not qualify for a mortgage. Fannie Mae and Freddie Mac as well as FHA like to see Debt to Income Ratios around 33%. This however is not carved in stone. I have seen people with ratios at 50% still get approved. Although it is much harder to do so.

Understanding the qualifying ratio

It is important to understand the concept of DTI before you begin to shop for a home or a refinance. If your DTI is too high, you can make the proper adjustments by paying off some debt or somehow reducing your monthly burden in order to qualify for mortage money.

As mortgage guidelines tighten, you must be aware of just where you stand. Before you apply for a mortgage, do your homework. Look at all the debts on your credit report. If possible, try to pay down as much debt as you can before the mortgage process begins.

The lower your debt to income ratio is, the easier it will be to get approved and the easier it will be for you to make your mortgage payment every month.