The Loan Marketplace

Question: Having watched the movie “The Big Short” is the mortgage business safe now? Since that caused inflated prices, are the prices still inflated?

Answer: I saw the movie as well and it was hard to watch as I remember that time very well. We had transactions that were about to close escrow when all of a sudden the process stopped and loans were no longer available and some companies closed their doors. The chickens came home to roost. The movie was an excellent representation of what happens when systems become lax or nonexistent. People that were not qualified for loans were getting loans they could not afford and the house of cards fell. As a result of that disaster the whole loan marketplace has changed.  If you look at a graph of the housing values over the last fifty years you will see the extraordinary rise and sudden fall of the housing values between 2005 and 2011 and then a gradual rise since then to back to prices of 2004-2005. The graph represents where the market would have been with normal appreciation if you draw the line following the normal line of appreciation.  However, those years of extreme appreciation followed by dramatic loss caused incredible loss for people. Many people who bought at the wrong time lost significant money, many lost their jobs and the general economy reached nearly depression levels. So, what about today?  The mortgage lending practices have moved to a very strong position that is protective of the market and the homeowner. Loans are made only to qualified individuals and incomes are checked and credit scores matter. There are no “stated income” loans where the person simply indicates how much they make without support.  IRS records are checked against the information given to the lender by the buyer. This has been the case now for several years and the result has been wise lending and a firm real estate market.  The bank owned homes are nearly nonexistent and there are a small number of short sales on the market now. The result is the base of the housing market is very stable. Going forward we will see realistic appreciation based on true market conditions. As the economy improves the real estate market will see a normal appreciation, maybe between 3-6% per year. Once more people are back working and feeling secure that demand will put pressure on prices to rise. I believe we have learned our lesson in the banking/mortgage world.  

Question: What is making it so hard to get a loan these days?

Answer: The truth is if you are qualified you will receive a loan from the bank.  What does it mean to be qualified?  You make enough income to be able to make your payments as well as all other financial obligations. You have good credit scores.  You have the available savings or investments to make the down payment for the loan.  Then all these items have to be verified by the bank and you have to provide the documents that support what you have indicated.  Of course, this makes sense.  What didn’t make sense were the days when documentation was not required.  The loan process should be started early in your real estate search.  When working with a buyer, the real estate agent should ask you if you have been approved or qualified for a loan with a lender. That is an important first step to determine the loan amount you will qualify for in your purchase.  For example, you have a down payment of $20,000 available and you need to know what you can buy.  You would likely need to purchase using an FHA loan with 3.5% down.  That would mean you would buy a home around $550,000.  You would have a loan amount of approximately $530,000.  Then the question is whether you have the income qualification to afford the payments on that loan and the credit scores needed. It may be that you would qualify for a loan amount of $480,000 and therefore you should look for a home selling for around $500,000.  You can see how important the loan approval is to your property search at this point.  You don’t want to fall in love with a $700,000 home if you can afford a $500,000 home.  There can be other considerations by the bank to approve the loan as well.  If you are buying a condo, you want to know if the condo complex qualifies for FHA loans.  The bank will also want to know if there is any litigation pending on the condo complex before they will approve the loan.  The bank will check your tax records against what you report as income to substantiate your income.  If you are new to a job, you may have to wait a few months before you will qualify for a loan.  Yes, the process is tougher than it was but it is better for the real estate industry and for the banks as these requirements strengthens the market and protects everybody from the abuses of the past that we are still dealing with today. People are getting loans every day.