New Standards Change Home Loan Landscape

When the nation's housing market boomed in the first few years of the 21st century, it was notoriously easy to get approval for a new mortgage. If you had a pulse, chances were good that a home loan was within your grasp.

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That all changed when the housing bubble burst. In recent years, lenders have remained cautious about offering mortgages, says Brent W. Ambrose, director of the Institute for Real Estate Studies at the Smeal College of Business at Pennsylvania State University in University Park, Pa.

But Ambrose says stricter lending standards are not necessarily a bad thing. He adds that prospective homeowners can take steps to improve their odds of securing a home loan.

Ambrose expands on those thoughts in the following interview.

Q: During the housing boom, it was said that anyone who could "fog a mirror" could get a mortgage loan. In recent years, however, it has become much more difficult to get financing. How has this tightening of the purse strings impacted the housing market?

A: We are living in an unusual time. Mortgage rates remain at historically low levels due to the Federal Reserve's monetary policy. That is helping support the housing market, and we are seeing signs of that support in the form of rising house prices.

In addition, demand is finally catching up with supply, and thus the inventory of unsold homes is declining.

However, mortgage underwriting standards have increased significantly compared to the period prior to the financial crisis. As a result, potential borrowers are finding it more difficult to qualify for mortgage credit.

Thus, we are seeing signs that many large investors are moving into the single-family rental business, with some evidence that the demand that is leading to increasing house prices is coming from investors looking for rental properties and not from traditional homeowners.

This situation is not necessarily negative, since households who rent their dwelling do not have capital tied up in an illiquid asset and are more mobile in response to changes in employment opportunities.

Q: Over the past year, has it gotten any easier to obtain a loan? Or are lenders continuing to be extremely cautious?

A: Recent evidence from the Federal Reserve's survey of senior bank officers indicates that lending/underwriting standards for residential mortgages remain unchanged. Thus, borrowers will still find that underwriting standards are more strict than during the period prior to the financial crisis.

Again, this is not necessarily a negative, since some have claimed that underwriting standards were too lax during the period leading up to the crisis.

Q: Which types of borrowers are having the most trouble securing a loan today?

A: With tighter underwriting standards, lenders are looking for borrowers to have larger down payments, documented/verifiable income and property values that conform to appraisals.

Households without those characteristics may face difficulties.

Q: What can people do to improve their chances of getting a loan?

A: First, I recommend shoring up the personal balance sheet by paying down consumer credit card debt and building up savings for the down payment.

Second, be realistic in choosing a property to buy. Don't overbid for a property such that the sales price exceeds values for comparable properties. In other words, make sure the property sales price conforms to expectations from appraisers, who will be looking to sales of comparable properties.

Finally, make sure that the debt level conforms to standard underwriting ratios of debt-to-income and payment-to-income.