Stop Complaining! Mortgage Standards are NOT Tight
Tweet
I’m tired of NAR and the rest complaining that lending standards are tight. And that a housing recovery is being held back by unnecessarily-tight lending standards.
Phooey. Thanks to the FHA, people with mediocre credit and hardly an cash can still borrow obscene amounts of money.
In the Bay Area for example, to purchase a $700,000 home with an FHA mortgage, a buyer would need:
- $24,500 down-payment (which could be a gift from Mom & Dad)
- $14-$15,000 for closing costs and prepaid expenses (which could also be a gift from Mom & Dad or credited from the Sellers)
- A mid-FICO score of 640 (the middle score from the 3 credit bureaus)
- 2 months of reserves in the bank ($9,485)
- All collections issues cleared up on their credit (harsh, I know)
- 2 years employment at the same job, but there could be some flexibility
- A back-end Debt-To-Income ratio of up to 50%, meaning:
- if the monthly PITI (plus mortgage insurance) for this purchase is: $4,742.52.
- then the gross monthly household income needs to be $9,500 – or $114,000 per year.
- (If there are car payments, student loans payments, or regular revolving credit card payments, then those amounts would be added to the $4,742.52 and income would need to be a little higher to achieve the same 50% back-end ratio. For example, if there were $500 monthly student loan payments, monthly income would need to be $10,500.)
Here’s the calculation breakdown:
- Loan amount of $682,255 (includes 1% FHA fee)
- Interest Rate of 4%
- Monthly payment is $3,289.76 plus:
- $75 insurance
- $729.17 property taxes
- $648.59 in FHA mortgage insurance
So with as little as $9,485 in the bank, a 640 credit score, and a gross household income of $114,000, you can buy a $700,000 home in the Bay Area.
Please stop whining about how restrictive lending standards are today.
2 months reserves is insane, and 50% DTI at that income level for someone living in the Bay Area is a recipe for disaster.
Thank you – THANK YOU for saying this.
And the absolute values of the rates are terribly low. Yes, I know savings accounts and other interest rates are also very low, but a lender needs to have a cushion for even a ‘normal’ default rate (and default rates are still very elevated). I don’t say this as a defender of bankers, but only as someone who understands the basics of lending. It’s not an exercise in charity.
People used to be amazed they could borrow half a mil at 6%; in fact so many were amazed they contributed badly to the housing bubble (along with other reasons). Now they’re getting 4% and some complain it’s ‘hard to get a loan’?
Anyone saying this is almost certainly the type who made money from origination fees and structured deals, and wishes that spigot were turned back to full again.
That situation was bad for the country, bad for the lenders, and bad for the borrowers. It was good for only a small number of sellers (but only those who did not immediately re-buy something else even more expensive).
Can we learn from our mistakes? People should be buying modest homes they can afford – that will create a healthy market and a healthy middle class. Somewhat higher lending rates would actually probably help bring that about by correcting prices downward quicker to where they need to be for affordability. Prices are very downward sticky.
$40,000 from mom & dad…in this economy…after sending their kids through school? Mom & dad are trying to stay afloat, thier ARM is resetting..
A $114K income used to be fairly easy to maintain in the Bay Area, not any more. This article reads like it was written from someone living in Danville.
You can get a place for 400-500K with a lot less income. This was simply an example. And, for what it’s worth, 700K can get you a pretty darn nice place in Danville nowadays.