The house is one thing; the mortgage is another. Perhaps the most daunting aspect of the market right now is the fact that the lending industry itself seems to need a serious renovation. How can you get the financing you need without risking collapse? We turned to Matt Hodges, a partner and loan officer at Compass Home Loans, with a bundle of questions.
How have loan qualifications changed in recent months?
“The general prequalification has not changed much,” says Hodges. However, “within the prime rate loans, they’re stratifying so that the highest credit scores have the best interest rates.” For example, if your credit score is 640, you may expect to pay half a percentage point at closing in order to secure the same interest rate that someone with a 680 credit score would get automatically.
What kind of debt-to-income ratio should borrowers take on?
“Debt to income is a personal decision,” says Hodges. The old standard, 36 percent of gross income applied to all debts, is “antiquated,” he says; these days the rules are more fluid. “Freddie Mac and Fannie Mae will allow for up to a 65 percent ratio on 100 percent loans,” he says. That’s a very high ratio which won’t make sense for most borrowers—unless, like one client of Hodges’, they have a fiancé whose income isn’t considered on the application. An honest conversation with your lender is in order.
Does it make sense to consider an adjustable-rate loan right now?
At the moment, says Hodges, ARMs are in general actually carrying higher interest rates than fixed-rate mortgages, making them less attractive. “Lenders realize the disparity, so they offer ‘teaser’ rates,” says Hodges—though still most ARMS “only make sense if you buy down interest rate by paying points” and for “those who plan to stay in the house for approximately the time of the fixed portion on the ARM”—selling before the higher rate kicks in. In short, for most borrowers right now, ARMs will not be the smartest choice.
What questions should you ask to avoid undue risk?
“The questions haven’t changed a single bit,” says Hodges. First, determine how long you plan to own the property. “If their window is three years because they’re in a stepping stone career, I’ll recommend a different product than a 30-year fixed,” says Hodges. Most importantly, ask yourself how truly comfortable you are with a proposed down payment and any possible payments that could come due if your interest rate adjusts. “I always look at the worst case scenario; they have to feel comfortable with a worst case scenario,” says Hodges.
