The home loan business has experienced significant changes since the real estate crash of 2008. Most notably it has become harder to qualify for a home loan. This is due to a variety of reasons including tighter approval guidelines, fewer finance options and harsher penalties for lenders that make loans that go into default.

Approval Guidelines Have Tightened

With a slow real estate market lenders have begun to take an increasingly conservative approach when underwriting home loans. The three most important facets of a loan approval include credit, income and the appraised value. In the last few years, the guidelines around each facet has gotten much more strict.

• Minimum credit scores required for a loan approval have risen from the mid 500’s to between 620 and 640. Credit scores are determined by three main credit agencies: TransUnion, Experian and Equifax. Each bureau calculates a credit score based on things like a borrowers loan payment history and level of debt. When lenders run a credit report on a borrower, they take the credit score from each bureau and take the score which is in the middle. This is called the mid-range score.
•  Income must now be completely documented with two years of W-2 forms, two years income tax returns and the most recent two-months paystubs. Also, lenders now require all borrowers to complete a federal form-4506. This allows them to verify the income shown on the loan application with the actual income reported to the IRS on the tax returns.
• Appraisals also take longer because they must be ordered through an independent pool of appraisers as opposed to an appraisal service that the lender may have had a previous relationship with. Lenders routinely require as many as five comparable sales on an appraisal report. In past years, lenders only required three comparable sales.

Fewer Financing Options

In the past, if borrowers didn’t meet the normal, underwriting (approval) guidelines of major banks, they could seek alternative financing sources from lenders that offered loans called sub-prime or Alt-A. These lenders allowed for more lenient guidelines, including less-strict income documentation, lower credit scores and loans at a higher percentage of a home’s value (sometimes as high as 100 percent, which meant that if a home appraised for $150,000 a loan could be had for $150,000.) These alternative lending sources have largely disappeared, which means borrowers have fewer financing options to choose from.

Harsher Penalties For Lenders That Make Bad Loans

In today’s lending market, all lenders must make loans that can be sold to Fannie Mae or Freddie Mac, which are government-backed lending organizations. This has become a fact of life in the loan business. Because of this, most lenders send their loans to Fannie Mae for review, prior to issuing a full-approval to a borrower. This can mean lengthy delays. In the past, lenders assumed that Fannie Mae would purchase all their loans as long as they met the rules published by Fannie Mae (ultimately, lenders make loans with their own funds or their own credit line, however, once they make a loan, they must sell it off immediately in order to free up funds for more loans.) Now, even if Fannie Mae agrees to purchase a loan, if there is any problem with the loan such as income not checking out, or an appraisal not making sense, a lender can be forced to “buy-back” a loan from Fannie Mae and this can be very costly to the average lender.