Could gloomy popular assumptions about how tough it is to get approved for a mortgage be scaring away large numbers of people who are qualified from even applying?
Could the same worries – I can’t come up with the big down payment I need, my credit scores are too low, my bank account has almost none of the “reserves” lenders want to see – put a needless damper on a housing recovery in the new year?
You bet. Lenders and economists will tell you flat out: The lack of accurate information about the availability of loan programs that are designed to address special needs is discouraging far too many consumers from even considering an application, much less shopping around.
Mortgage banker Alex Stenback of the Residential Mortgage Group in Minnetonka, Minn., says he sees it every day: “People just aren’t aware of what’s possible right now” and as a result, they are missing real estate prices and long-term interest rate opportunities they should not. Doug Lebda, founder and CEO of LendingTree, the online site that allows banks to make competing offers to applicants, believes that “the fear of being rejected” because they don’t conform to standards that may not even exist, is keeping qualified applicants on the sidelines for no reason.
For example, what’s needed for an acceptable down payment? Is it 20 percent? Ten percent? Less? Yes, it’s less – and potentially a lot less if you qualify for the right program. The widespread, erroneous assumption that banks require a minimum 20 percent for conventional loans may have arisen from heavy media coverage this spring and summer of a controversial proposal by federal agencies calling for borrowers to put down that much if they want to get the best interest rates and lowest fees.
Also contributing to incorrect beliefs about down payments: The Obama administration floated the idea of a phased-in move to 10 percent upfront cash for all loans eligible for purchase by mortgage giants Fannie Mae and Freddie Mac, who together dominate the conventional home-loan sector. But neither the 20 percent nor the 10 percent plan has been adopted and the odds of either moving forward in 2012 are remote. Fannie Mae’s and Freddie Mac’s standard minimums are still 5 percent with mandatory mortgage insurance coverage.
If you have little or no cash to put down, there are multiple options for you: FHA requires just 3.5 percent down on its insured mortgages. Other programs let you go to zero – even finance more than the price on the house when fees are rolled into the mortgage – provided you fit into an eligibility niche. If you qualify as a veteran or active member of the military, you can get a zero-down VA-guaranteed mortgage. Plus the VA allows your seller to pay your loan fees and closing costs provided they don’t exceed 6 percent of the house price.