It's a preapproved buyer's market
House hunting gets trickier as mortgage standards tighten
If you're heading into the spring home-buying market without a newly preapproved mortgage, you may be in for a surprise.
Lending criteria have changed in the wake of troubles in the sub prime mortgage market. As a result, some real estate agents aren't interested in showing you any properties until you know how much you'll actually be able to borrow.
"People still think mortgages are easy to get with 0 percent down, like a couple of years ago. They're behind the times," explains Ted Duncan , an agent with RE/MAX Select Realty in Allston. Two years ago, he said, he would have shown prospective buyers several properties before suggesting that they get mortgage preapproval. Today, he wants buyers to do a reality check up front so that their expectations are in line with their purchasing power.
Consider the case of three recent graduate school grads who wanted to buy a three-flat in the Allston-Brighton area, putting 5 percent down and borrowing the rest. The idea: To live in one apartment and rent out the other two. Although the numbers worked, the three couldn't find a lender that would approve a mortgage with less than 10 percent down, Duncan says. So without even looking at a single property, the three decided to keep renting until they qualify for a mortgage on the type of property they want.
Folks who were preapproved as recently as last year will need to update. The $500,000 mortgage they qualified for last year may have shrunk to $450,000 or less. For some, this smaller mortgage may determine whether they can afford that extra bedroom, that big backyard, or even a new home at all.
Yet preapproval can also help buyers navigate today's sometimes challenging real estate market. The preapproval process initially surprised Patti Sionne of Mansfield.
"I didn't do that before," said the part-time nurse, who last bought a home 14 years ago. Once she knew exactly how much she could afford, however, she was comfortable taking action, making an offer on a single-family home that was accepted the night before the scheduled open house.
The current crop of mortgage-market problems developed when sub prime lenders -- those who make loans to people with poor credit ratings -- made too many loans to people who couldn't make their monthly payments.
Once home prices started to fall, people who were having a hard time making payments sometimes found it was cheaper to simply walk away. That's because many of these loans required no down payment or even a verification of annual income.
Last year's sub prime loans started defaulting at a higher than expected rate, with many borrowers becoming delinquent in the first three months of a loan, says Bob Visini, vice president of marketing at First American LoanPerformance, a mortgage data company.
Then, as more homeowners defaulted on their loans, the sub prime lenders, who typically promise investors they will buy back troubled loans for a set period of time, couldn't honor those obligations to investors and started closing their doors.
One result: There are now fewer lenders making loans to these riskier borrowers. Those lenders still doing business in the sub prime market are requiring bigger down payments and verifiable income.
Indeed, the disappearance of some of the most aggressive lenders -- combined with an increase in inventory that has pushed prices down to more affordable levels -- has meant an increase in business for others.
"In the first quarter, we're 25 percent ahead of where we thought we would be in terms of total dollar value of mortgage originations," says Joe Bartolotta, spokesman for Eastern Bank. "We are also seeing our customers ask more detailed questions."
Others have also noticed the increased demand for consumer education. Attendance has soared at the "Homebuying 101" classes that Jacqueline Cooper, president of Financial Education Associates in Dorchester, runs for the City of Boston.
"Last year, we were complaining that there were hardly any people in the class," she says. This year some 50 people turned up for one of the classes, forcing Cooper to bring in an additional instructor.
Even the types of mortgages people are taking are starting to change. More people are applying for fixed-rate mortgages, instead of opting for more exotic mortgages like interest-only or option adjustable-rate mortgages. At Summit Mortgage in Boston, the most popular product right now is a "boring vanilla 30-year fixed," says chief executive Rick Fedele.
A narrowing of interest rates is also fueling the trend. The spread between a five-year adjustable and a 30-year fixed-rate mortgage used to be three quarters of a percentage point or more. "Now it is down to an eighth or a quarter," says Fedele, noting that there's not enough savings for people to opt for the ARM.
Tighter lending criteria, however, doesn't mean that there aren't lenders ready to write mortgages for low- to moderate-income homebuyers, says Esther Schlorholtz , senior vice president of community banking at Boston Private Bank & Trust Co.
Many of the people who got hurt probably weren't financially ready to buy, Schlorholtz says. "They shouldn't have bought and borrowed so much money that they couldn't afford to repay," she says. "But there were plenty of subprime lenders willing to take their loans and then sell them to someone else" so that the lender never got hurt.
In the Boston area, however, the mortgage numbers indicate a stabilization of market. As of the end of January, the percentage of the market in the sub prime sector was down to 7.6 percent from 8.8 percent in February 2006, according to data from First America LoanPerformance. And within the subprime sector, both the foreclosure rate and number of mortgages with payments more than 60 days overdue appear to have stabilized.
That mortgage data reflects what real estate agents are seeing in the market. "Truthfully, the market is much better than it was a year ago," says real estate agent Gil Campos of CamposHomes with RE/MAX Real Estate Center in Foxborough.
His sales are up about 25 percent compared to this time last year. People have been waiting for the past year for a market crash that hasn't materialized, he says. Now with prices down but stable, they figure it's time to take the plunge. "We're having a good spring." 