Summary of Mortgage Changes for 2010

This page provides a summary of mortgage industry changes that are relevant to home buyers. We will update this page throughout 2010, in order to keep it current. Last update: 12/28/09

There have been more mortgage-related changes in the last six months than in the previous six years. The housing crisis and economic recession are the main reasons for this. What does this mean for first-time home buyers? It means they will face a different real estate market in 2010 than what we’ve seen before.

Here’s what home buyers should know about mortgages changes in 2010:

Higher Credit Scores Across the Board

In 2010, home buyers will need higher credit scores than they would’ve needed a few years ago. There are two qualification “tiers” when applying for a mortgage loan. You need a certain score just to be approved for the loan, and you need a certain score to qualify for the lowest rates available. (Sometimes you’ll reach the first mark, but not the second.) Both of these cutoff points have gone up over the last year or two.

The exact score required will vary from one lender to the next, so we can only generalize things here. But it’s safe to say you’ll need to be above the 620 range to be approved for a mortgage, and above the 760 – 780 range to qualify for the best rates available.

There are several reasons for this change within the mortgage industry. For one thing, lenders are less willing to take risks on borrowers with bad credit. That’s partly the reason we had a mortgage crisis to begin with. Secondly, Fannie Mae (a company that buys loans from direct lenders) recently increased its minimum-credit-score requirement from 580 – 620. This means that lenders who want to sell their mortgages to Fannie Mae must enforce that same requirement when approving loans.

Note: This, along with the down-payment factor below, will be one of the most common reasons for mortgage rejection in 2010. So before you start applying for loans or talking to lenders, you should find out what your credit score is — and work on fixing it, if necessary. On the main Home Buying Institute website, you’ll find a library of more than 100 articles on credit score improvement.

Stricter Requirements for Down Payments

The days of zero-down mortgages are over. See the “extinction” notices further down the page. In the past, mortgage lenders were willing to finance 100% of the purchase price, giving home buyers who could not afford a down payment a path to homeownership. Those days are over — for 2010 at least. Depending on the type of loan you obtain, you’ll need a down payment of 3.5% to 20%.

This is actually a good thing, though many first-time buyers don’t realize it. The more money you put down on the purchase, the more equity you have from day one. People who make larger down payments are also statistically less likely to default on the mortgage later on.

Changes to FHA Loans in 2010

Mortgage loans insured by the Federal Housing Administration (a.k.a. FHA loans) are very popular with first-time home buyers. You can put less money down with one of these loans, and the qualification process is generally easier than with a conventional loan. But the FHA’s monetary reserves have dwindles over the last couple of years, so there have been some key changes to this loan program. Here’s what home buyers should know about FHA loans in 2010 …

For one thing, you’ll have to make a larger down payment. The previous requirement was 3% of the purchase price. It was recently increased to 3.5%. If certain members of Congress get their way, the down payment requirement could increase to 5% (though the “jury” is still out on that).

Other Changes in the Mortgage Industry

Here are some other mortgage changes that will affect borrowers / buyers in the 2010 economy:

  • There have been quite a few bank failures and mergers over the last few years, especially at the national level. So home buyers will find fewer options when shopping for a loan at that level. In addition to the “big banks,” home buyers should look into local banks and credit unions. In some cases, you can get a lower rate and better service at the local level.
  • Most of the so-called “exotic” mortgages have become extinct. This includes a wide variety of creative financing tools, most of which were designed to put unqualified borrowers into home loans. Zero-down mortgages and interest-only home loans fall into this category. (Editor’s note: These dangerous mortgage strategies should be illegal in the first place, but we will settle for having them disappear.)
  • The Federal Reserve has stated that it will keep interest rates at their current level for the foreseeable future. As a result, mortgage rates could remain low for most of 2010. They are currently hovering in the 5% range and might stay there for the next few months.

We will update this page as other changes occur within the mortgage industry.

New Rules for Good Faith Estimates – Effective January 2010

Starting in January 2010, mortgage lenders will face some new rules regarding the “good faith estimates” they give out to borrowers. The goal is to give home buyers a more accurate picture of the costs they will incur.

Editor’s Note: This is an update to an older news story, which will come to fruition in the next month. These changes were actually put in motion at the end of 2008. The changes take effect at the beginning of 2010, two weeks from now.

Before we go any further, a definition is in order:

New GFE formGood Faith Estimate (GFE) — An estimate, provided by a mortgage lender, detailing the full costs of a loan. Among other things, it must include the interest rate and all other costs and fees associated with the loan (i.e., closing costs).

In accordance with the Real Estate Settlement Procedures Act (RESPA), the good faith estimate must be given to you within three business days of your loan application. This helps borrowers comparison-shop between different lenders.

There are two key parts to this statement — “estimate” and “good faith.” Because it’s an estimate, it may be slightly different than the amount you end up paying at closing. But it’s also supposed to be made in “good faith,” which means the lender has tried their hardest to be accurate and forthcoming. But this is not always the case.

In the past, these estimates have been, shall we say, less than faithful. Mortgage lenders have been known to downplay various fees, in order to make the loan seem more affordable up front.

Often, home buyers are surprised to find additional costs and fees on closing day — items or amounts that were not disclosed in the good faith estimate. Sometimes, even the true structure of the loan is not fully disclosed. This is a criminal act, plain and simple.

Changes to Good Faith Estimate Paperwork

In truth, this has been a problem for a long time. So these recent actions to increase the accuracy of GFEs are long overdue. These estimates will never be 100% accurate (they are called “estimates,” after all), but these new changes may at least reduce the willful omission of costs. Time will tell.

The new guidelines are intended to increase the accuracy and completeness of GFEs, partly by mandating the use of standard forms and disclosures.

The Department of Housing and Urban Development (HUD) will require usage of the new standardized form for good faith estimates, starting on January 1, 2010.

The first document above (the GFE) is the one discussed in this article. The second document (the HUD-1 Statement) is one that you’ll get a few days before the actual closing.

What This Means to Home Buyers

As a home buyer, one of the best things you can do is to save as much money as possible. You’ll need money for a down payment, closing costs on the mortgage, moving expenses, and probably a few other things you’re not even thinking about right now.

While the Good Faith Estimate might be more accurate in 2010, it’s still only an estimate. Whatever amount of closing costs your lender discloses, you should prepare yourself for a higher amount on closing day. If their GFE is accurate, great! But if the actual costs are higher (which is so often the case), you will at least be prepared for it.

Down Payment on FHA Loans Could Increase to 5%

The down payment for an FHA home loan could soon increase from 3.5% to 5%. This comes in direct response to the FHA’s dwindling funds.

The Federal Housing Administration needs money. The FHA insures mortgage loans made by direct lenders, such as Wells Fargo and Citi. But with the rash of defaults and foreclosures across the country, the FHA’s financial reserves have taken a serious hit. The House Financial Services Committee has raised the question of making these government-backed loans more expensive to obtain, and a new House bill could raise the down payment requirement from 3.5% (the current level) to 5%.

In addition to raising the minimum required down payment, the FHA Taxpayer Protection Act would also prevent the financing of closing costs. In other words, home buyers would no longer be allowed to roll their closing costs into the loan.

Incidentally, there is a strong correlation between the amount of money home buyers put down, and the likelihood that they will default on their mortgage in the future.

What This Means to Home Buyers

The FHA insures about 30% of all mortgage loans made within the United States. A government-backed loan is generally easier to qualify for, and more affordable on the front end. With a traditional home loan (one that is not insured by the FHA), you may have to put up to 20% down in order to be approved. But with an FHA loan, you can make a down payment as low as 3.5%. If the requirement gets raised from 3.5% to 5%, you’ll have to save more money to put toward your house.

Here’s an example of how this change could affect a first-time home buyer. Let’s say that I want to buy a house that costs $150,000, and I’m using an FHA home loan to pay for it. Here is the amount I would have to pay under the current guidelines, versus the proposed increase.

  • A down payment of 3.5% = $5,250
  • A down payment of 5% = $7,500

Bottom line: If you’re planning to use an FHA loan for your purchase, time may be of the essence. If the House bill is passed, it could go into effect next year, in 2010. This means you’ll have to come up with a larger down payment, when compared to the current guidelines.

2012 Update on This Story

There was continued discussion about this topic, throughout 2011. But as of January 2012, the Department of Housing and Urban Development still has no immediate plans to implement a 5% down-payment requirement on FHA loans. The current minimum is still set at 3.5% for qualified borrowers with credit scores above 580.

There has also been talk of implementing a mandatory 20% down payment for conventional mortgage loans. This discussion has followed along with the development of the so-called Qualified Residential Mortgage (QRM). We did a story on this subject in January 2012. As with the FHA changes, this is still theoretical at best. In 2012, well-qualified home buyers will be able to put as little 5% down when purchasing a home with a conventional loan.

Credit scores are equally important when applying for a mortgage, regardless of the financing program you use. Most lenders today are requiring FICO scores of 600 or higher when qualifying applicants. Of course, this can be offset by the size of a borrower’s down payment. A lender might relax this requirement for a borrower who can afford to put 20% down. This reduces the size of the bank’s investment (i.e., risk) in the deal, which typically makes them more flexible in other areas of qualification.

So, to recap. There has been a lot of talk about HUD raising the required down payment on FHA loans from 3.5% to 5%. But as of January 2012, it has not progressed beyond discussion. For now and the foreseeable future, the minimum remains at 3.5% of the borrowed amount.

You’ll Have to Pay Points to Get the Best Rate in 2012

Note: This story has been updated for 2012. We have adjusted the mortgage rate information and other points within the article to make it more relevant and useful for home buyers in 2012.

At the start of 2012, we are still enjoying some of the best mortgage rates we’ve seen in years. As of January 10, the average rate for a 30-year fixed loan was 3.91% (according to Freddie Mac’s market survey). This is certainly good news for home buyers. But many buyers don’t realize what it takes to qualify for those rates. In fact, many of the people I’ve spoken to by email are surprised to learn that the rates advertised on a lender’s website don’t apply to everyone across the board.

“What do you mean you can only give me a 4.8% interest rate? I saw 3.95% offered on your website.” Answer: Welcome to the world of teaser rates. Lenders will typically advertise their very best offers on their websites, in order to lure in more business. But in reality, only the most well-qualified borrowers will be offered the best mortgage rates in 2012. And believe me, this is a small and “elite” group — probably less than 25% of all borrowers. These are people with excellent credit scores (north of 760), sizable down payments, and minimal debt. Does this describe you? If so, you may very well qualify for the best rates in 2012.  Otherwise, you might have to set your expectations a bit lower.

Essentially, you can forget about the rates advertised on the lender’s website. They are not very useful when it comes to comparison shopping. You need to find out what they are willing to lend you, based on your particular qualifications. And you may have to pay “interest points” at closing, in order to lower the rate over the long term (more to follow on this).

A Crash Course in Mortgage Rates

Here’s what you need to know about qualifying for the best mortgage rates:

  • The average rate on a 30-year fixed rate mortgage has been hovering below 4% since December 2011. By way of comparison, at this time in 2008 the average rate was over 6% for a 30-year loan.
  • Rates are expected to remain low for most of 2012 — but probably not this low. I predict they will remain below 5% for most of the year, and slowly rise thereafter.
  • Not everyone can qualify for the best mortgage rates, though. Some people may get an even lower rate, while others will have to pay more interest on their loan. It depends on (A) how well qualified you are in the eyes of the lender, and (B) how much money you bring to the table at closing.
  • If you want to get the lowest rates available, you’ll probably have to buy points at closing. One point is equal to one percent of the loan amount. When you pay points up front, you can secure a lower interest rate on the loan. Some buyers use this strategy to save money over the life of the loan (by reducing the interest and thus the size of the monthly payment).
  • According to the Wall Street Journal, home buyers who secured the best rates on fixed mortgages had to pay, on average, 1.17 points at closing. On a loan of $250,000, this would mean paying $2,925 in points at closing (250,000 x .0117).
  • To qualify for the best rates, you’ll also need to have an excellent credit score (defined here). You’ll need to meet the lender’s definition of a “well-qualified borrower” in other ways, as well. Generally, this means having a FICO credit score of 760 or higher, a down payment of 10% or more, and a favorable debt-to-income ratio.

Buying a home in 2012 could be a smart move, as far as your interest costs are concerned. If you can meet the lender’s definition of “well qualified,” you could lock down a historically low rate on your loan. But you may have to pay points at closing to get the best mortgage rates available, and you’ll definitely need an excellent credit score.

If you use an FHA home loan, you’ll be required to pay at least 3.5% down. If you get a traditional loan (not backed by the FHA), you’ll probably have to make a down payment of 10% or more to qualify for the best rates.