First Step In Home Buying Or Refinancing

Often, home buyers put the cart before the horse. Specifically, the cart is the home search and the horse represents the mortgage financing. If you're considering buying or refinancing a property, the first step is to contact your lender- not your Realtor- as this approach will lead to a less stressful, more efficient home buying experience. If you haven’t been in the market for a mortgage in the past 24 months, you’ll notice a more detailed process is in store for you as the mortgage industry has experienced an overhaul in guidelines, the variety of loan programs available and a more complex appraisal process. Although it has become a more detailed loan process, the good news is that mortgage rates are historically low and Washington metropolitan area real estate prices are the lowest they’ve been in years.

After a long period of lax loan qualification guidelines, a return to common-sense underwriting has prevailed. Borrowers will need a down payment of at least 3.5%, a middle credit score of at least 640 and they will need to have documentable income. Self- employed consumers, for example, will be required to show tax returns as qualification will be based upon their adjusted gross income. Furthermore, Fannie Mae and Freddie Mac have expanded their Risk Based Pricing, resulting in a pricing penalty to borrowers with imperfect credit and even those buying a condo.

FHA requires that condos are already on FHA’s “Approved Condos” list at the time of purchase. Fannie is now requiring condo buyers to put down 25% to avoid a bump to the rate- just because the property is a condo. So, someone with a 680 credit score, putting down less than 25% will get a rate approximately 0.25% higher than someone with a credit score of 740 who is putting down 25%. Then there’s the issue of appraisals.

This past summer, new laws were implemented to prevent lenders from having access to appraisers. Born out of an appraisal-fixing scandal in New York, in which some banks were charged with colluding with appraisers to inflate housing values, these new guidelines aim to prevent similar cases in the future. The new law, called Home Valuation Code of Conduct (HVCC), added another step in the appraisal process. Now, instead of a lender ordering an appraisal through a licensed, local appraiser they’ve dealt with for many years, they have to order the appraisal from an Appraisal Management Company (AMC). This middle man, the AMC, then randomly passes out the orders to appraisers affiliated with them. The result has been appraisals of questionable quality with values that vary wildly.

Finally, the variety of loan products has changed from the past. For example, stated-income loans and negative amortization loans are sparsely. Investment property loans are requiring a larger down payment while true jumbo loans (those above $729,750) are 1% higher than non-jumbo loans and require larger down payments.

For all these reasons, it is important to reiterate that you need to line up your financing first, before considering property options with your Realtor. This background information is intended to prepare consumers to take advantage of today’s attractive real estate market which is coinciding with historically low mortgage rates.

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