Preapproved and ready to move? Not so fast
The subprime mortgage crisis has forced skittish lenders to tighten rules for borrowers
Justin Moore (right), and Lenny Licari of B-Sure Home Inspection Inc. check out the fire escape on a Beacon Hill condo. Moore had to scramble to get a mortgage when his first loan fell through.
(Globe Staff / Mark Wilson)Justin Moore had done his research when he set out to buy a condo. The 25-year-old said it even seemed easy when he got preapproved for a loan, found the perfect condo in Beacon Hill this fall, and readied for his December move.
But just one week before his scheduled closing, the mortgage company that for weeks had assured him he was all set told him there were problems.
First, Michigan-based Quicken Loans said he would have to pay a point at closing to keep a 6.25 percent interest rate because his credit score was below 680. Then he got a frantic call from the representative he had been working with telling him the company couldn't give him the $225,000 mortgage after all.
"They said they couldn't fund a condo where all the units aren't sold yet," said Moore, who was slated to put a 20 percent down payment on the first unit finished in the building. "Where is there a situation where all the units are sold?"
Moore got hit by the fallout of the collapse of the subprime mortgage market, in which borrowers of all types have found it harder to get loans because lenders have tightened eligibility requirements or even stopped making certain kinds of mortgages altogether. Borrowers also have fewer shopping options as dozens of mortgage companies have also gone out of business in recent months.
Those that remain in business are asking buyers to more completely document their incomes. They are charging higher interest rates to those whose credit scores were considered good just weeks ago, and demanding much bigger down payments, especially for homes in areas where property values are dropping.
The changes mean that buyers with credit scores below 680 could have to front 30 percent down or more to get market rates on a mortgage.
"The industry has turned around and closed the door," said Brian Koss, managing partner at Mortgage Network Inc., headquartered in Danvers. "People were getting what they wanted, not what they needed."
Some buyers have been able to get new loans under the old terms because mortgage companies are adopting these new lending standards at different times.
"Most of our customers have been unscathed at this point," said Rosemary O'Neil, vice president of Conway Financial Services in Norwell and past president of the Massachusetts Mortgage Association. "But after the first of the year, that changes across the board."
In January, most companies will have adopted new standards set by
The new rules impose surcharges of 0.75 percent to 2 percent for many conventional borrowers who have credit scores below 680, and who don't have at least 30 percent for a down payment. Fannie Mae says the lenders may pass along those fees in a variety of ways.
Those in the industry worry many will be priced out of the market. O'Neil notes that about half her customers have credit scores less than 680. "It will definitely affect our business," she said.
And few buyers ever pay 30 percent down payments. "That's pretty insane . . . not a lot of buyers will be able to do that," said Alex Coon, the Massachusetts market manager for online residential real estate brokerage Redfin. "It's certainly not going to do any favors for the real estate market."
Those changes take effect March 1, but mortgage companies that sell their loans will likely be using them earlier. Multifamily units and condo conversions also face more scrutiny.
"Some of these guidelines are returning to what they once were," said Koss, who has been in the business for 22 years. "There's a lot more caution built into the system. Everyone's willing to spend more time, to do a little more work."
For buyers, the changes mean more last-minute scrambling and no guarantees, Coon said. Just before one recent closing, he said, one buyer was asked to track down his tax return from 2004. Another deal fell through the day before closing because the buyer lost the loan.
"I've been doing this eight years and out of the eight years, mortgages had been one of the constants," Coon said. "It used to be everybody could get a loan for everything."
More buyers are even skipping the whole mortgage process entirely, paying all in cash or trying alternative financing methods such as tax-free exchanges in which investment properties are rolled over to buy new property, said Rita Gallant, who has run Plymouth Village Realtors for more than 20 years.
In response, sellers, too, are upping their standards, Coon said, so they aren't left hanging when deals fall apart. For example, he said some sellers require buyers to have been preapproved for mortgages from well-known, reputable banks. They also want sizeable down payments. And they are seeking mortgage contingency clauses as an escape that lets them kill the deal if the buyer can't get a mortgage in a specified period.
This all comes at what otherwise should be a great time to be buying a home. Prices throughout the region have dropped, sometimes to below what sellers paid at the height of the Boston area boom. "The opportunity to buy right now is enormous," said Coon.
Moreover, mortgage rates have been dropping in the later part of the year, to close to 6 percent for a 30-year-fixed rate mortgage, and even less for other loan types. "Rates are still very good," O'Neil said, "But in order to get those rates, there's some new criteria that didn't exist in the past."
Those in the business do say that not all funding has dried up. "There's still plenty of mortgages available for people with all the right elements to get a conventional loan," said Coon.
And for those who cannot come up with the money for a hefty down payment or who don't have perfect credit, there may still be options. Many banks and other lenders have first-time homebuyers programs with relaxed standards or additional assistance. Some buyers purchasing less expensive homes also may be eligible for loans from the Federal Housing Administration or MassHousing, the state's affordable housing bank.
"There are some alternatives," O'Neil said. "We just have to find them."
Koss recommends that borrowers should shop among a variety of mortgage providers; that is, consult a mortgage broker, a mortgage company, and a traditional bank, and not three different mortgage brokers. "If you're talking to three banks or three brokers, you may miss something," he said.
But, he noted, those who keep getting turned down should probably take a hint and stop applying. "You have to ask yourself, why are they doing this?" he said. "There's probably a reason why."
In Moore's case, Bob Walters, chief economist for Quicken Loans, said the loan fell through because the company feels that funding mortgages for the first unit of an unfinished condo complex is too risky. Quicken Loans also changed its guidelines for credit scores to meet the new standards before Moore had locked in a rate.
So, left without a loan days before his scheduled move, Moore scrambled to find a new lender with help from his Redfin agent.
In three days, Moore was able to get a loan through 
