-- Homebuyers such as Bob and Janet Zych have fueled the U.S. housing market for decades.
They have excellent credit with scores that top 800, life-long careers and investment portfolios that have set them up for a comfortable retirement, they say.
But this year, "after faxing a ream of paper" about their finances, they got so fed up applying for a home loan that they simply wrote a check for their new, $85,000 vacation condo in Phoenix.
Trying to get a loan "was just a nightmare," says Bob Zych, 65, a manager for Mohawk Industries in Omaha.
Following the greatest housing crash since the Great Depression, home lending standards have tightened to their strictest levels in decades, economists say. And people such as the Zychs and others nationwide are paying the price.
Tight home loan credit is affecting everything from home sales to household finances. Many borrowers are struggling to qualify for loans to buy homes. Others can't take advantage of some of the lowest interest rates in 50 years because they don't have enough equity in their homes to refinance. Those who can get loans need higher credit scores and bigger down payments than they would have in recent years. They face more demands to prove their incomes, verify assets, show steady employment and explain things such as new credit cards and small bank account deposits.
Even then, they may not qualify for the lowest interest rates.
The National Association of Realtors says lending standards are too tight and are hurting the housing industry's recovery.
The lending industry counters that standards are where they need to be, given still-falling home prices and the shaky economy.
"It used to be anybody with a pulse could get a home loan. Now you have to be an Olympic athlete," says Guy Cecala, of Inside Mortgage Finance.
"The pendulum has swung too far."
Down payment amounts rise
The change is evident in the higher quality of loans held by government entities, which now buy or guarantee most new home loans.
Lenders that originate loans seek to meet their standards so that they don't have to hold loans themselves.
Through June, single-family home loans bought by government-backed Freddie Mac, for example, had an average down payment of 29% and an average FICO credit score of 751, the agency says. That's up from average down payments of 23% for loans originated in 2007 and average FICO scores of 707, Freddie Mac says.
FICO scores top out at 850. The national median is 711, FICO says.
New Federal Housing Administration loans, popular with homebuyers who lack big down payments, likewise are being made to borrowers with higher credit scores.
From January through March, those loans went to borrowers with an average credit score of 704, up from 631 four years ago, FHA data shows.
Even the worthiest borrowers have to put down more money than a few years ago to get the best loan terms.
Real estate website Zillow analyzed 3.6 million loan inquiries made through its website to mortgage lenders since 2008.
In July, prospective borrowers getting the best loan rates had average down payments of 28%. Three years ago, before the worst of the financial crisis, such shoppers averaged down payments of less than 24%, according to data from Zillow Mortgage Marketplace.
"The people getting loans over the last couple of years are largely pristine," say Robert Walters, Quicken Loans chief economist. "Lenders are making sure no stone is unturned."
A struggle to close
Sometimes, even borrowers with seemingly pristine finances are struggling to close home loans.
Stephanie, 45, and Brian Poore, 46, of Hubert, N.C., went through two lenders this year before the third extended them a loan on an $86,000 condominium in Wilmington, N.C. The couple bought the condo for their daughters, ages 19, 16 and 15, to use during college.
The first lender went overboard on income questions, Brian Poore says, asking him to prove that he didn't pay for room or board while living on an Army base in Iraq, where he works as a contractor.
Another lender qualified the couple for a loan, given their credit scores above 780 and other financial resources. But then the lender backed off, saying it couldn't resell the loan to Fannie Mae because the condominium homeowners' association didn't have enough cash reserves for maintenance and repairs.
With the third lender, the Poores had to put 25% down — not the 15% they originally intended.
The process took five months. The loan was for $67,000. One of the Poores' relatives recently bought a new car and got a $55,000 loan in less than a day, Stephanie Poore says. "I feel bad for anybody having to go through this," she says.
The Zychs were hamstrung by lenders' concerns about their previous investments.
During the past five years, they acquired three rental properties — all in Omaha — that were leased and produce a positive cash flow for the couple. When the Zychs went to buy the Phoenix condo, lenders balked, saying they had too many properties, even though their finances were solid.
"How would anybody ever get a loan if we can't get a loan?" Bob Zych asks.
Roberta Fernandes, 24, a first-time homebuyer, got a loan. But not without help. She needed almost 50% down to get a loan to buy her Miami condo in June. Fernandes is an assistant to a financial adviser at a brokerage firm. Her short work history hindered her ability to get loans with smaller down payments.
Her parents put up more than half the required down payment. Without their help, getting a loan "would have been impossible," Fernandes says.
Jose, 40, and Ivelte Hidalgo, 35, also recently bought in Miami. Jose started a medical research consulting business in 2007. Ivelte works in the business, too.
Because they were newly self-employed, the couple were turned down by two lenders for home loans in 2008 and 2009.
They finally secured an FHA loan for a $280,000 house, which they purchased this summer. The couple put 3.5% down, the FHA's minimum.
With higher down payment requirements and tighter standards for conventional loans, the FHA has become a major player in the home-lending market.
For the first six months of this year, almost 51% of loans to buy homes were done through the FHA. That's up from 3.4% in 2007, says Inside Mortgage Finance.
But FHA loans aren't always the best deal.
Although they have smaller down payment requirements than conventional loans and credit criteria that are not as strict, there are limits on how big FHA loans can get.
FHA borrowers also pay a 1% upfront fee that conventional borrowers don't pay. And if buyers have enough money for larger down payments, they can avoid higher FHA premiums for mortgage insurance, which protects against default.
It can also take longer to get rid of mortgage insurance on an FHA loan than on a conventional loan, says Keith Gumbinger, of mortgage tracker HSH.com.
Conventional loans with less than 20% down are available. However, such borrowers need mortgage insurance. In general, the lower the down payment, the more one pays in mortgage insurance. Interest rates also rise as credit scores drop.
For some properties — including those needing bigger loans, condominiums and homes in areas hard hit by the real estate crash — 20% or more down payments are the norm, says Greg McBride of Bankrate.com.
Nearly all borrowers are facing more documentation requests.
Except for a few years leading up to the real estate crash — when some borrowers got loans while providing little if any documentation of their assets and income — borrowers have long had to supply two years of tax returns, pay stubs and financial statements when applying for home loans.
Now, lenders want tax records to come directly from the IRS, as well as from borrowers. The IRS releases the records after applicants sign forms giving it permission to do so. Instead of two months of bank statements and pay stubs, lenders may want them for each pay period until the loan closes.
Howard Landa, a California physician, purchased a $900,000 home in Moraga, Calif., last year and refinanced it this year. The refinance lender wanted pay stubs for every two weeks as the loan was in process, which took almost two months.
Landa also had to explain a new Macy's credit card line, which he opened to qualify for a discount on a suit he bought from the retailer.
When he bought the house, Landa had almost enough money to pay cash for it. He also had an outstanding credit score of 810. Even so, the lender carefully checked his income, even requiring copies — front and back — of several $500 and $1,000 checks he deposited in his checking account after being reimbursed for travel expenses.
"It seemed like an incredible waste of my time and their money," Landa says. "They're trying to dot I's and cross T's to show that they checked 40 documents, but it doesn't mean that they're important documents."
Reduced risks = fewer defaults
Higher standards do appear to be reducing loan defaults, which means fewer foreclosures in the future.
Fewer than 1.3% of loans originated in 2009 that were resold to Freddie Mac and Fannie Mae went into default after 18 months, government data show. That's down from more than 22% default rates for 2007 loans and about 3% default rates in 2002.
Avoiding defaults has become a primary goal of wary lenders, says Walters, the Quicken Loans economist.
They fear loans will go bad and the investors that buy them — such as Freddie Mac, Fannie Mae or others — will discover mistakes and sue the originating lender.
Many such lawsuits are underway.
"Our line of defense is to cross T's 42 times and dot I's 52 times," Walters says. With home prices continuing to fall across much of the nation, lenders realize that any mistake "could be fatal," he says.
Yet, the National Association of Realtors, and a number of consumer groups, say the tight standards are also a drag on the economy.
The NAR estimates that home sales — stuck at anemic levels — would jump 15% to 20% if lending standards simply returned to where they were a decade ago, before they got so loose they helped create the real estate bubble that later popped.
However, lending standards are unlikely to loosen until home prices stabilize, says mortgage loan expert Jason Kopcak of investment bank Cantor Fitzgerald. Nationwide, home prices are down 30% from their 2006 peak and are expected to fall more this year.
"The industry is basically status quo," agrees Michael Copley, head of retail lending for TD Bank.