Q: How would you compare the process of getting a mortgage today with 10 years ago?
A: If you go back 10 years, there is very little difference. That's because in the early 2000s, the industry relaxed the guidelines. It became easier and easier to get a mortgage. If you go back 10 years, assuming you were a W-2 employee (working for an employer), we needed to see pay stubs and W-2s and a bank statements. If you were self-employed, we needed to see income tax records.
Q: So we've doubled back to where we were before?
A: Very much so. The number of individuals who qualify automatically is shrinking. If you take a self-employed landscaper who goes out of his way to show us that he makes $5,000 a month — but then has enough write-offs to show little or no income — it doesn't work anymore. They may have made payments forever on a loan, but their taxes show they don't make any money. Five years ago, we could have gone with a stated income document for that person. That avenue no longer exists, so that buyer is out of the market.
Q: Using a $100,000 home as an example, what is the impact of present mortgage rates?
A: The average mortgage rates right now are the lowest since 1951. When I got into the business in 1995-96, the mortgage rates were 8.25 percent, and now they are hovering around 4 percent for a 30-year fixed mortgage. If you are borrowing $100,000 at 4-percent interest, the monthly payment would be $478. If you are borrowing at 8.25 percent, it would be $751.
Q: So waiting for a house to drop a few thousand dollars wouldn't necessarily pay off if interest rates jumped overnight?
A: In my mind, we are in a sweet spot for buyers, with low prices and low mortgage rates. Let's say you have a $120,000 home — and remember a 100-percent financing (is) still available with a USDA rural housing loan if you buy in small communities outside Medford and Central Point — at 4 percent, you would pay $573 a month for a $120,000 loan. If it dropped to $100,000 and the interest rate was 7 percent, it would be $665 monthly. If we take that and extend it over 30 years, the difference of $92 a month ends up being $33,000. There are plenty of houses in our areas for under $100,000. You can get a $90,000 home, with principal and interest payments of $445 — with estimated (property) taxes and insurance, the total would be $604 — arguably cheaper than renting a home.
Q: Who is most likely to encounter obstacles?
A: Documenting income is the biggest obstacle. If you are a typical W-2 employee and don't have excessive debt and have reasonably good credit, you can qualify. You can get FHA loans with a credit score as low as 560, but typically you want a 620 score or better.
Q: Can you define what you mean by excessive debt?
A: In the industry, we use a debt-to-income ratio where the lender typically allows 41 percent of gross monthly income to go to (a) house payment and current debt. The more current debt they have, the smaller house payment a buyer would qualify for. If you have a car payment and a credit-card payment or two, assuming they are not huge, we're not going to blink an eye. If they have significant student loans, multiple credit cards, large car payments, etc., it would be more difficult unless they had high income. If someone makes $8,000 a month, because they are a higher-income person, they can have more debt and still qualify.
Q: Are you seeing more fiscally disciplined home-loan applicants?
A: We're seeing it more and more. That's a good thing because we're seeing people waiting to buy a house until they get their financial affairs in order so they are in a stronger financial position. They are cutting back in areas, allowing them to buy a house and not feel the sting as time goes on.
Q: Does that mean you are seeing adjustments in lifestyle, a need for fewer toys?
A: The mix of customers we see in this industry runs from first-time homebuyers to savvy investors with multiple properties. Overall, the trend we're seeing is for people to be more conservative with their finances and doing what they can to qualify. We've had customers sell cars, sell tools or do whatever they need to have more funds or assets in reserve or for a down payment.
Q: Are mortgage lenders doing more financial counseling than in the past?
A: Negative credit is more prevalent than in the past, so in this industry we're getting more queries from people who have had foreclosures or short sales, wanting to know how much time it takes before they can buy again. It might take several years before we can close a loan for those customers, but we can put them on a path to where they can buy in that amount of time. We, and our competitors, are looking for the trapdoors that might prevent customers from buying, and we address those issues. If a credit score is a little too low and they need to dispute something with a credit-card company, we help with that process so they can come back in 90 days to see if they are at a point where we can help them with a loan. If someone has a high car payment and it is going to be paid off in a year and half, maybe they can refinance the car to help with their debt-to-income ratio.
Reach Mail Tribune business editor Greg Stiles at 541-776-4463 or email firstname.lastname@example.org. Read his blog, Economic Edge, at www.mailtribune.com/economicedge or follow @GregMTBusiness on Twitter.