2011 Guide to Obtaining a Mortgage

For those of you who are contemplating obtaining a mortgage in 2011, there are a few things that you should bear in mind. Unfortunately, most of these trends are bad: lending standards have become more stringent, mortgage costs and interest rates are rising, the time required to obtain a mortgage will increase, and fewer types of mortgages will be available.

Following the collapse of the housing bubble, lenders were quick to tighten standards. Since then, the credit markets have become unfrozen and there is once again demand Mortgage-Backed Securities, due in no small part to the Federal Reserve Bank’s Quantitative Easing Program. On the other hand, the overwhelming majority of mortgages are now underwritten by Fannie Mar and Freddie Mac, which have moved to curtail their risk exposure by implementing more rigorous requirements. In practice, that means higher credit score thresholds (>740 to secure the most favorable terms), higher down-payment (>25% to avoid penalties), and 2 years worth of documented income. If/when the provision of the Dodd-Frank Financial Reform law requiring lenders to have some “skin in the game” is implemented, you can expect even greater scrutiny of borrowers’ creditworthiness.

Meanwhile, mortgage rates have climbed steadily from their October lows, and are projected to continue rising over the course of 2011. 30-year fixed rates have risen the most, compared to 15-year fixed rates and variable rates. On the bright side, rates for jumbo mortgages (up to $ 417,000+ in most markets) have actually ticked down slightly, which is good for borrowers seeking to obtain loans for expensive properties.

Fees and closing costs are also rising. As a result of increased regulations, lenders have insisted that mortgage applications are now much more expensive to process than they were a couple years ago, and are passing these added costs onto borrowers. On the bright side, this same regulation means that Good Faith Estimates (which are provided by the lender upon receipt of the application) are more likely to be accurate, so at least borrowers will have a better idea of these (increased) costs early in the process. Mortgage Insurance (which is usually required for borrowers that make down-payments less than 20%) is also more expensive. FHA mortgagers have already seen their annual insurance premiums rise by .5%. Ultimately, the biggest cost increase can be attributed to Fannie Mae and Freddie Mac, which now assess substantial “loan level pricing adjustments,” which can easily exceed $ 5,000.

Borrowers that deviate from plain-vanilla financing (i.e. 30-year fixed rate loan, 25% down-payment, stand-alone residential property) can expect to pay a higher interest rates, additional fees, and added difficulty in obtaining a loan. That applies to certain types of variable rate loans and non-standard properties, such as condos. Lenders have warned all borrowers that they should expect longer wait times in loan processing in order to comply with new verification and documentation requirements. Borrowers that wish to obtain a rate lock are advised to do so for a longer period of time.

In light of this increased hassle/cost, an estimated 29% of buyers are opting to avoid the mortgage process altogether, by paying cash for properties. For those of whom that this isn’t an option, you should at least be aware that obtaining a mortgage is unfortunately going to be more problematic/frustrating in 2011.