Good series from Newsday this week:
Hard times for first-time homebuyers
With the mortgage industry reeling, rookie homebuyers struggle to qualify for loans
BY TAMI LUHBY
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Second of two parts
It's gotten a lot tougher for first-time home buyers to secure a mortgage these days.
With the mortgage industry rocked by soaring delinquency and foreclosure rates, particularly in the subprime loans made to people with weaker credit, lenders have become a lot stricter about doling out the dough. They have tightened their credit standards, requiring higher down payments, better credit scores and more documentation on income and assets.
These higher hurdles hit first-time home buyers, who often struggle just to accumulate a down payment, particularly hard, experts said.
"Even six months ago, it was pretty easy to get almost anyone a mortgage," said Bethany Marten, founder of Baldwin-based Home Buyers' Resource Center, a buyers' agency, and Mortgage 1, 2, 3, a mortgage broker. "In the past, really marginal buyers could get mortgages. But we have a lot of people we can't do loans for right now."
Until earlier this year, home buyers enjoyed more than a decade of easy credit, which helped fuel the housing frenzy. Lenders not only loosened their standards but also created so-called "exotic mortgages," which allowed people of lesser means and weaker credit to buy homes. Lenders offered mortgages requiring no down payment or carrying low initial interest rates for the first two to five years that made monthly payments affordable. Such mortgages made it possible for many first-timers to buy homes.
Now, a growing number of people are defaulting on those mortgages, particularly subprime ones made to people with blemished credit histories. As a result, lenders are pulling back on their offerings. In the past two weeks, for instance, several have said they are eliminating so-called 2/28 loans, which are usually subprime loans that have a lower fixed rate for the first two years before jumping to a higher adjustable rate.
Also, federal and state regulators are cracking down on lenders, saying they should take into account not only the borrowers' ability to handle the monthly payments during the teaser rate but also when that rate expires and the payments grow.
Lenders said this practice will cut many people -- including a lot of first-time home buyers -- out of the market.
"It will preclude millions from buying homes," said John Robbins, chairman of the Mortgage Bankers Association. Already "the industry is making the most conservative loans that it has in 10 years."
Lack big down payment
Today's first-time home buyers face many hurdles, experts said. Most of the ones whom Marten sees have saved less than $20,000 for a down payment, which may sound substantial but is typically less than 5 percent of a home's price, she said. On Long Island, the median home price is roughly $445,000. Also, many have poorly managed credit or a lack of credit, so their FICO credit scores are 600 or below (out of a possible 850), said Marten, whose clientele is about 75 percent first-timers.
Until the tightening, Marten could find a lender for those with relatively poor credit or with little for a down payment or with scant income documentation. She could secure a mortgage for people with credit scores of 620 but with no proof of income or with small, if any, down payments. She could get loans for clients who needed 100 percent financing but did not have the best credit history.
She turned away maybe 5 percent of applicants.
No more. Now, she said, she tells about one-third of applicants that they aren't going to qualify.
Loan officers are now being more stringent even when it comes to getting prime mortgages, which carry lower interest rates and are offered to people with stronger financial records, said Marianne Garvin, president of the Centereach-based Community Development Corp. of Long Island, which assists first-time home buyers in securing a loan. They are looking for credit scores of at least 660, up from 600 a few months ago.
"They want to see a stronger credit profile to get a conventional mortgage," Garvin said.
Before he could get approved for a mortgage and enter a lottery for a CDC affordable housing development in Mattituck, Russell Smith said, he knew he had to improve his credit profile, which was about 600. So he pulled his credit reports last year, found some mistakes and cleared them up. He also caught up with payments on his student loans and took care of some outstanding debts. Finally, he raised his score to the high 600s -- and got approval for a loan through a U.S. Department of Agriculture home financing program. He's getting a 33-year fixed rate mortgage at 5.75 percent.
"They kept saying you need to do this and need to do that. I kept going back and forth," Smith said. "But when they told me I was approved, it was all worth it."
Lenders like to see savingsIn addition to better credit backgrounds, lenders want to see that applicants have money in the bank and are lowering their debt burdens.
Some, for instance, require that less than 40 percent of a borrower's gross monthly income would go to debt payments, which includes the mortgage, as well as car, student loan and credit card payments, said Lynn Law, director of education and counseling at the Hauppauge-based Long Island Housing Partnership, which provides homeownership counseling. Previously, some lenders would have accepted a figure as high as 50 percent.
Also, some lenders want borrowers to have funds on hand -- in bank accounts, retirement accounts and investments -- to cover at least six months of expenses.
As for the down payment, the requirements can vary widely, experts said. Those with credit scores in the 700s and good incomes, as well as a healthy reserve fund, could secure 100 percent financing. Other borrowers may have to pay 3 percent down or 5 percent down, depending on their financial backgrounds.
Of course, first-time buyers with clean credit backgrounds and money in the bank can still secure a mortgage fairly easily.
Good credit scores pay off
Keith and Nicole Herrador moved into their Lindenhurst home in mid-June after renting a one-bedroom apartment in Brooklyn Heights. They had spent the past two years saving for a down payment and eventually accumulated nearly 10 percent. But they didn't have to worry about their credit scores, which were in the 700s, because they always paid their bills on time and never carried balances on their credit cards.
"Between looking at our credit scores and how much cash we had in reserve, we felt pretty confident we'd be approved for a mortgage," said Herrador, 29, a human resources manager in Manhattan.
And they were. The couple landed a 30-year fixed mortgage with a 6.375 interest rate.
Those who don't have such strong financial records may have to delay their dream until they pay off some debts and build up more savings, experts said."We've had to learn to say no if the credit really needs work. Not now, later," Law said. "If I see a credit score in the 500s, I think this person should wait."
That's exactly what Michelle Grant of Rosedale is doing. She and her fiance, Kenneth Goffe, want to buy a home in the Rosedale or Laurelton area of Queens, but they wouldn't be able to get a good interest rate if they applied now because of their financial backgrounds.
So they went through the CDC's first-time home buyers program to learn what they needed to do to better their chances of getting a prime mortgage.
Grant, who works as an equity research analyst at Standpoint Research in Forest Hills and as a personal trainer, is focusing on curtailing her spending, while her fiance is paying down his debts to improve his credit score, now in the mid-500s.
"I want to do the things I need to do to secure the best rate possible," said Grant, 32.