The Browns have solid employment, good income and prequalified for a home loan a year ago. However, getting the bank’s approval has involved intense scrutiny and endless rounds of paper work from underwriters.
To improve their situation, the Browns paid off a student loan and bolstered their savings. In the interim, they missed their closing date and the home they hoped for was sold to someone else. A year later, their dream home is still just a dream.
By most measures, getting their loan should not have been a problem. Prices are leveling off, the job market is recovering, and interest rates are low. However, home sales are on pace to fall this year for the first time since 2010.
In the past it was too easy to get a home loan, now it is too hard. In the past there were no rules or regulations and now we are stymied with them, and some of them are ambiguous. Additionally, the potential penalties are not worth the profits, according to the Mortgage Bankers Association.
Federal rules, such as the so-called putback rules – that federal regulators have pledged to clarify – can force banks to buy back mortgages they have already sold off, if regulators find even minor errors in loan documents that can be hundreds of pages long.
On a $400,000, a lender might net $1,500, but you can be on the hook for hundreds of thousands of dollars. So, there is little wonder why the banks scrutinize so carefully. Since they can ill afford to risk a loan that could potentially be defaulted on, the banks concentrate on credit scores and will only write a loan when the borrowers meet certain, and very strict criteria.
The average FICO on granted loans today are around 740, whereas in the past they were in the mid-600s. This is significantly lower than the scores that are rejected for home loans today. So home buyers like the Browns, who have good job history and plenty of money, are still being overlooked for home loans. They simply do not fit the pool of “perfect” borrowers.
So potential buyers who would typically qualify but do not have perfect credit are boxed out of the market. How many? In the neighborhood of 1.2 million home sales were blocked in 2012. The possible solutions are regulatory changes. The rules have to be better defined and made to reduce risk to the bank.
While we wait for bureaucratic changes; changes that could take a very long time, other short term strategies could be implemented. Why not help consumers with their credit issues? The perceived view that those with less than desirable credit scores are irresponsible consumers simply does not hold water. In fact, the housing crisis is responsible for more poor credit scores than any other factor. Many otherwise responsible consumers have credit profiles that are riddled with foreclosures, short sales and other derogatory entries that are a direct result of the housing crash.
Due to the credit bureaus poor record keeping and proper follow-up, plus the inaccurate information that typically goes onto roughly 93% of all consumers’ credit reports, the potential for credit clean-up are outstanding.
Many potential homebuyers could conceivably go from a low 600s score to the 700s with just a few months of work conducted by a reputable credit repair company and then find themselves in a position to actually have the bank fund the home loan.