Banks, mortgage industry tightening home loan standards
SIKESTON -- Despite government initiatives, including steady interest rate cuts, the mortgage industry is making it even harder to borrow for home buyers or those who want to refinance their home loans -- even those with good credit.
For new home buyers and those seeking to refinance, it can mean higher down payments and a higher bar for credit scores, among other requirements.
"We haven't had any stricter limitations on our loans or anything like that. It's mostly changes in the secondary market," said Terry Williams, community bank president at Southern Missouri Bank in Sikeston. This is the strictest he's seen the industry in his 25 years in the lending business -- and said it's similar to how the market was about 20 years ago.
Secondary loans are those that the banks sell to lenders such as Wells Fargo, CitiBank and J.P. Morgan Chase, among others.
"They are tightening their underwriting guidelines," agreed Elizabeth Lorenz, assistant vice president at First State Bank and Trust in Sikeston. Secondary loans such as those are always used in cases where a buyer wants a fixed mortgage, she said -- while the bank does the paperwork, it doesn't provide the financing.
That's leading to a drop in the number of people being approved. "Previously, a lot of these mortgage companies would take a little bit more of a risk," said Charlette Vanover, mortgage lender at Montgomery Bank. "Before, a lot of these mortgage companies would finance just about anybody, but not anymore."
Williams said one of the biggest changes is that 100 percent financing is more rare -- which leaves buyers with more money to come up with for a down payment. "Now it's more like 95 or 97 percent," he said. "They're cutting back on their loan to value."
He's also noticed that lenders now require higher credit scores for buyers.
Lorenz pointed out another hurdle for those looking for a new home loan. "Fannie Mae and Freddie Mac no longer offer the stated income products," she said. That means instead of more or less accepting the stated income of an applicant, the companies are checking it out.
Locally, the bank is looking at home loan applicants' discretionary incomes more closely, said Lorenz.
"We have to make sure the buyer has a lot more discretionary income than they did before, because of fuel prices, which are passed down on other prices," said Lorenz. "Before it was going to service debt, and now it's used to keep up with household expenses."
Vanover added: "You want them to own the house, not the house to own them."
The toughest restrictions are in markets where home prices are falling -- mostly on the East and West coasts, Williams pointed out.
However, there is some good news. The lower rates do give buyers the opportunity to lock in a home loan with a low rate, due to recent rate cuts by the Fed. "It's still a good time to come in and try to lock something in -- especially for those with adjustable rates looking to refinance," said Williams.
And there are likely many people looking to do that, said Lorenz. "A lot of subprime mortgages are set up for the person to have a fixed rate the first two to three years and after that, it adjusts every six months. A lot of people are no longer able to afford those rates," she said.
"If there is someone with an adjustable rate mortgage and their balance is such that they want to refinance, I would really consider this to be the time," suggested Vanover. "I think it's an excellent time."
Williams added that, for the most part, the tightening of guidelines will affect new purchasers more than those just looking to refinance.
The three encouraged people to continue doing as others have for years: start looking into credit scores and home loans well before looking for homes to buy.
"Know where you stand so that you're not surprised," suggested Lorenz.
"It's a good idea to go online and check credit reports," agreed Willliams.
He offered another piece of advice: to shop around when it comes to home loans. "And if you're uncertain about the information you're given, ask questions."
The Associated Press contributed to this report.