Finding a Mortgage Today Is Harder, but Doable

As Shawna Bennett and her husband, Joe, shop for their first home, they are constantly weighing neighborhoods, schools and cost.

But now as the nation's mortgage market continues to tighten, the Michigan couple find themselves closely watching the headlines and readjusting their finances to stay in the market.

They have paid off some loans and lowered their expectations about what type of house they can afford.

"We decided to go with a home for much less than we originally wanted," Shawna Bennett said. "We don't want to overextend ourselves."

Buying a home has never been an easy task.

But today as many lenders are tightening standards, many home buyers are finding that they have to jump through more hoops or change their plans.

For the Bennetts, that meant searching for a house in the $115,000 to $120,000 range instead of the $130,000 they planned to spend in November. They have also paid off one loan and have just two more monthly payments left on their car loan.

"We realize that we have to wait longer and it's frustrating for us because we're 28, we're college graduates. We feel like we've done the right thing by going to school and waiting to have our baby and get married," Bennett said. "But we're just not able to have the same kind of start that our parents had."

Across the country, families like the Bennetts are facing increased scrutiny as they look to buy a home.

Just a few months ago, some borrowers could buy a home without making any down payment, said Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association.

That option is now practically nonexistent, Brinkmann said, with buyers generally required to put down at least 5 percent to get a conforming mortgage, a loan that typically has the most competitive interest rates and competitive qualifying criteria.

Borrowers today must also be able to document their income. In the past, some consultants, contract workers and people who earn commissions were able to get some higher-priced mortgages without fully documenting their income. Now lenders want all that information plus proof of additional savings.

Brinkmann said lenders essentially want to ensure that you haven't "spent every penny you have to get into the house and then can't pay the first month's electric bill."

Today's mortgage problems stem from several years of historically low interest rates and relaxed lending standards. In the last few years, many lenders made loans to people with poor or bad credit — so-called subprime borrowers.

As interest rates climbed, many of these people who borrowed with adjustable rate mortgages failed to keep up on their new, higher payments. Others who got mortgages for more money than they should have borrowed are also struggling to make payments.

The Mortgage Brokers Association said that 4.33 percent of all mortgages in the country were past due in the first three months of this year. That is up from 3.96 percent during the same period last year. That's a 9.3 percent increase.

RealtyTrac, a widely cited marketplace for foreclosure properties, tracks the number of foreclosure filings such as default notices, auction sale notices and bank repossessions. One property can get several of each notice.

Its data say that during the first half of this year, such notices surged more than 30 percent from the previous six-month period and more than 55 percent from the first six months of 2006.

Pava J. Leyrer, president of the Michigan Mortgage Brokers Association, has been working with the Bennetts. She said buyers today are not looking at the price of a home but at what their monthly mortgage payments will be. She said people are factoring in local taxes, personal mortgage insurance and other monthly expenses that were once ignored.

"I think they're really starting to look at their overall budgets," she said.

Across the country, Frank Bowersox, president of the Pennsylvania Association of Mortgage Brokers, sums up the market today this way: "We have returned to doing business the way we did 10 years ago."

Today's buyer will need to make a larger down payment than before, Bowersox said, but there are still plenty of loans out there.

"The industry is sound and will take its lumps as it has before, but we'll bounce back and still help the consumer who wants the joys of homeownership," he said. "We'd be putting our heads in the sand if we didn't identify the fact that there are some problems, but at the same there are loans being closed each and every day of the week."

Olga Kucerak, president of the Texas Association of Mortgage Brokers, said the market has obviously tightened.

"Monies that are available have been restricted," she said. "But there is still money out there for your borrowers with good credit, good documentation of income. We're still making loans."

Kucerak said most borrowers are staying away from adjustable-rate mortgage and sticking with traditional 30-year-fixed-rate mortgages.

There are many factors going into whether or not somebody gets a mortgage.

Lenders consider how much money somebody is trying to borrow compared to their income. Generally, the mortgage payments — including taxes and insurance — shouldn't be more than 28 percent of pretax income, according to the Mortgage Bankers Association's Brinkmann. When credit card and other outstanding debt is added in, the debt figure should not be more than 32 percent to 34 percent.

Finally, in some higher-priced markets there is another complication: the market for so-called jumbo loans has almost completely dried up.

Any mortgage for $417,000 or more is considered a jumbo loan, regardless of the sale price of the home. This distinction stems from guidelines established by Fannie Mae and Freddie Mac, quasi-governmental lenders who buy up the bulk of mortgages made for first-time home buyers or those done for affordable housing.

There are very few people willing to buy jumbo loans on the secondary market and those few buyers who once existed are now reluctant to take on such mortgages.

Jumbo loans are a small part of the mortgage industry and are only found in high-priced real estate markets such as California, New York, Chicago, Seattle and Boston.