Prior to the financial crisis in 2008, I would sometimes hear the phrase “If you can fog a mirror, you can get a mortgage,” meaning that if you were breathing, you would be approved. While that’s not true, there were a lot of people who shouldn’t have gotten a mortgage prior to 2008, when underwriting guidelines were most flexible.
After the financial crisis, mortgage underwriting guidelines did a complete 180. They went from the easiest to the hardest that I had ever seen in my 28-year career. Fannie Mae and Freddie Mac had experienced almost $170 billion in losses and were set to change the course of mortgage lending and ultimately foreclosures.
The very tough underwriting guidelines that have been in place since 2008 have begun to loosen up. For instance:
- Lower credit score borrowers are now getting approved for loans they would have been denied just a short time ago.
- Borrowers with higher credit scores are able to push the limit on what they can qualify for. The monthly income-to-debt ratio was usually limited to 45 percent; now many loans can be pushed to 50 percent. Before, if a borrower is grossing $10,000 per month, we would allow him $4,500 in total payments. Now in some cases we will let you go to $5,000.
- Less reserves are required. In the past, the borrow was usually required to have two to three months worth of mortgage payments in the bank after closing as a cushion. Now most approvals do not require any.
Some might say that this is what led to the financial crisis of 2008 and other will say that we’re able to loosen the reigns because the real estate market and overall economy are on solid ground and can absorb some additional defaults if the economy turns.
I personal would not like to see the underwriting guidelines get any more flexible. I feel that we are at a level where Fannie Mae, Freddie Mac and FHA have become very accommodating to today borrowers. Any further loosening of these underwriting guidelines could bring more buyers into the market that are not qualified, which would push real estate prices up and then lead to an abundance of foreclosures when the economy takes a pause. Usually, as soon as unemployment goes up and people lose their jobs, defaults begin to happen, which can be very scary.
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