Myths About Getting a Home Loan in Today's Market
With the spring homebuying season upon us, it's important to get the facts straight on home financing and credit availability. Interest rates are at historic lows today, and house prices in many markets across the country are more attractive and affordable than they have been in years. Yet many people believe that they can't take advantage of these opportunities because credit either isn't available or it's virtually impossible to qualify for a mortgage. As the head of the Single-Family Business at the nation's second largest mortgage investor, I wanted to set the record straight.
First, let me start by explaining that Freddie Mac does not make loans directly to borrowers. We operate in the secondary mortgage market: we buy mortgages from lenders, who can then use the proceeds to fund loans for other borrowers. We do, however, set the underwriting requirements for the loans that we buy. Mortgages and the borrowers' ability to repay are evaluated using several critical risk characteristics, including loan documentation standards, FICO scores, loan-to-value ratios, debt-to-income ratios, and other important factors.
These standards, and those of other investors, were tightened in the wake of the recent housing crisis – and quite rightly so. Even with stricter standards in place today, we're finding that generally the single-family loans being delivered to us are well within our credit parameters.
Let's take a look at some of the myths about the mortgage market today. And talk frankly about the reality.
Credit parameters are too tight. We don't believe this is true. Even borrowers with average or less-than-stellar credit scores may be able to get a loan if they have the other C's of capacity to pay and collateral. For example, a borrower with a credit score of 620 may still qualify for a conventional, fixed-rate loan if they can demonstrate a strong ability to pay and have the necessary collateral. That's because we take a holistic look at all the C's to determine eligibility, so weakness in one of these areas does not necessarily disqualify a borrower. While these borrowers may pay a higher interest rate than another with stellar credit – we call this risk-based pricing – they could still quality for a mortgage.
You need 20 percent down to purchase and finance a home. That's another myth. Freddie Mac's current limitations on loan-to-value ratios (LTV) – or the amount of the loan compared to the lesser of the contract sales price or the appraised property value – is 95 percent. Borrowers putting less than 20 percent down are generally required to pay monthly mortgage insurance premiums but they can still obtain a mortgage if they meet other lending requirements.
Underwater borrowers are stuck in their homes and can't refinance. Again, not true. Even borrowers who are underwater may be able to refinance their loans and take advantage of today's low interest rates thanks to the Home Affordable Refinance Program. Eligible homeowners who are paying their mortgage on time – and their mortgage is owned or guaranteed by Freddie Mac or Fannie Mae – may have an opportunity to refinance into loans with more affordable monthly payments and/or fixed-rate terms. In December 2011, the program was expanded to allow eligible borrowers who have mortgages with current LTV ratios above 125 percent to refinance under the program.
Freddie Mac has the final say in decisions on who can get a mortgage. We play a role in setting credit standards and mortgage investment requirements, but ultimately it's the lender's decision – not Freddie Mac's – about whether a borrower gets a mortgage loan.
Freddie Mac's policies on loan repurchases deter lending. False. Freddie Mac requires mortgage lenders to repurchase loans when we determine that a loan delivered to us doesn't comply with our underwriting guidelines or proves to be inconsistent with other representations and warrants the customer has made about the quality and characteristics of the loan. For example, one of the top three reasons we require performing and nonperforming loans to be repurchased is due to borrower income that has either been miscalculated or not documented. None of these requirements stand in the way of qualified borrowers being able to obtain mortgage financing.
Sound underwriting standards are vital to the long-term health of the mortgage market, the broader economy, and most important, America’s families. Our goal is to help put borrowers in homes they can afford now and also keep for the long-term. At the core, our credit principles are prudent, and we continually review our underwriting standards and make the necessary adjustments around the edges to address market conditions and reflect customer feedback. In fact, we recently fine-tuned our HARP program requirements to help increase the number of borrowers who can refinance at today's low rates. This approach enables Freddie Mac to provide a large and continuous flow of money to borrowers nationwide while at the same time protecting the significant investment American taxpayers have made in our company.
* Anthony Renzi left his position at Freddie Mac in May 2012.
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