By Bill Gaylord
It is truly amazing all the changes that have occurred in the mortgage industry since the meltdown began in 2007. Virtually all of the focus from the media is talk of toxic mortgages and bailout by the U.S. Treasury and what caused all the problems. There has been very little discussion about how it has impacted the every day consumer and how difficult it can be to now qualify for a mortgage.
The pendulum has swung way too far to the other side for qualification purposes. It is hurting all spectrums of borrowers from lower end all the way up to high-end borrowers. There is a particularly huge gap in the jumbo market on loans greater than $697,000 in San Diego County. Underwriting standards have gone back about 10 years. There is no doubt that stricter guidelines were necessary to clean up the industry. However, the strict guidelines are removing extremely well qualified buyers from the market at a time when our economy needs them to purchase homes and keep the economy moving.
Good credit dichotomy
A perfect example is a couple that recently relocated to San Diego. For privacy purposes, we have used a fictitious name. Colonel Johnson and his wife, Dr. Johnson, were looking to buy in the $1 million price range in Carmel Valley in July 2008. Colonel Johnson recently retired from the armed forces and has relocated to San Diego. He has secured an outstanding civilian job and has a lucrative pension from his service in the armed forces. His wife is taking some time off to get their two kids settled in school and study for her medical boards in California. They sold their previous home and have 15 percent to use for a down payment on their new house, not to mention substantial assets in retirement. Their credit score is incredibly high approaching 800. What could possibly be the problem with this scenario?
"We were absolutely stunned when we were told that we could not purchase a home." said Colonel Johnson.
Why couldn't the Johnson's buy a $1 million home? They easily qualified based on income and feel totally comfortable with the payment. Their credit score is in the top 5 percent in the country. The issue was they did not have enough money because virtually every jumbo loan program now requires at least a 20 percent down payment.
Changes in loans
Earlier in the year loan programs existed for a down payment of less than 20 percent. Second mortgages were also a very common way to secure financing for a home with less than 20 percent down. Now, most banks are requiring jumbo mortgages to have at least 20 percent down with some as much as 50 percent down. Second mortgages are virtually non-existent. "When we were told we would have to get a gift from my parents in order to qualify, I about fell out of my chair! I'm 48 years old for goodness sake!" said Colonel Johnson.
The Johnsons decided to rent for a few months to save the additional amount for the 20 percent down payment. It has been challenging to say the least. They currently occupy a three-bedroom apartment. Colonel Johnson's new job is home based and one of the rooms is used for his office.
The Johnsons have now lowered their price range to $850,000 so they can take advantage of the current Fannie Mae and Freddie Mac lending limit of $697,000 in San Diego County. However, at the end of 2008 this limit will expire. The new limit is expected to be reduced to an unknown limit based on median home values in San Diego that is anticipated to be somewhere between $575,000 and $625,000. If they miss the end of year deadline, they will be subject to the higher jumbo loan interest rates and possibly higher down payment requirements.
This is just one example of the difficulty in securing financing for highly qualified borrowers. The qualification standards have changed and consumers should understand the new rules of the game.
Bill Gaylord, a Rancho Santa Fe resident is a Principal and Mortgage Planner with the Gaylord-Hansen Mortgage Group. He is also a member of the Rancho Santa Fe Community Center Board and the Rancho Santa Fe Education Foundation.