Housing affordability is the best it has been in decades. The combination of downward-adjusted real estate prices and mortgage rates that are the lowest since Eisenhower was president makes owning one’s own home a seeming no-brainer. Even with a small down payment and large mortgage, owning a home costs the same as, and often less than renting the same home.
Welcome to the real estate boom of 2011!
Wait…what? The market is struggling? Aren’t buyers falling all over themselves to carve out their own piece of The American Dream? Apparently not.
The news media are significantly to blame. Headlines proclaim, “High Lending Standards Eliminate Most Home Buyers!” Newsreaders on TV at 6 and 11 intone, “Lenders are making up for their previous loose standards, so they hardly approve anyone for a loan these days.”
I’m here to tell you that this is not just a lie; it is a shameful, misinformed lie. While it is true that lenders are far more careful today than they were in those days when everyone was approved, underwriting standards are still reasonable. Any buyer who can document income, who has a reasonable—not perfect—credit history and who has even 3% cash for a down payment will be able to get financing for a home.
I know this because I see buyers get approved for mortgages every day. I wade with them through the inch-thick stack of documents they sign at the closing table. And I rejoice with them when I say, “Your escrow has closed. You are now a homeowner.”
How much of an ordeal is it, really, to get a mortgage? Do the lenders really demand a DNA swab? No; although the process is far more rigorous than it was just three or four years ago, it is still possible to get a home mortgage without turning over one’s first-born.
The standards required by most lenders are surprisingly simple: A borrower should have monthly payments (mortgage, taxes and insurance plus any other long-term debt) no higher than 50% of gross monthly income. Credit scores for conventional loans can go as low as 620—and in order to have a score that low, one must have derogatory items on the credit report. Someone with a 620 score will pay a higher interest rate (about .75% higher), but that borrower will still have a mortgage of around 5%. Those negative items will have to be explained to the underwriter, but so long as the explanation is reasonable, a couple of late payments won’t cause disapproval.
All the cash involved in the transaction must be documented and “paper-trailed.” If a borrower gets income in cash, that money won’t help for the down payment unless it has been sitting in an account for at least a month. Cash income may also cause problem for some self-employed borrowers, but there are often ways to overcome this fact.
The real problem is not the supposedly impossible lending standards. The real problem is that many people—prospective buyers and real estate agents—believe these inaccurate accounts, and give up. It is a classic self-fulfilling prophecy.
And that is the greatest shame of all.