If there's one thing lenders have learned from the housing meltdown, it's that making high-risk loans entails, well, a lot of risk.
As a result, banks have severely tightened lending standards and increased paperwork requirements. That's made the application process quite a doozy for aspiring homeowners.
Borrowers are now forced to invest significant time and resources into meeting the strict requirements of banks, sometimes staying engaged in talks with banks for an extended period of time only to learn that their loan has been rejected. Occasionally, rejection comes even after prospective borrowers have already paid an appraisal fee or other costs.
But a new mortgage qualification tool could help borrowers avoid this scenario. Perhaps the most sophisticated of its kind, the tool assesses a borrower's loan qualifications based on various factors and determines, lickety-split, what options he or she has to choose from.
The tool guides the user through "something that the borrower doesn't do until he gets to a loan provider and spends some time with the loan provider," according to its creator, Jack Guttentag, a professor of finance emeritus at the Wharton School of the University of Pennsylvania.
Accessible on Guttentag's site, The Mortgage Professor's Web Site, the tool assesses a user's credit-worthiness by crunching data that includes homeownership history, property value, the equity that a borrower owns or intends to own upon buying, and his credit score. The tool also factors in documentable income, debt payments and home location -- all in the hope of providing the user with a full understanding of borrowing options.
Shooting for an FHA-insured mortgage? Improve your credit score and make sure you can muster at least 3.5 percent equity, the report may suggest.
Or want to clinch a conforming mortgage and avoid private mortgage insurance (PMI) payments? The report may suggest that you worry less about your credit score and more about scraping together a sizable down payment -- 20 percent if you're looking to rid yourself of PMI altogether.
Guttentag based the tool's metrics on the specific lending standards of various lenders and general mortgage borrowing rules of thumb.
The tool may be the only one of its kind. That's because banks, says Guttentag, have no interest in "providing any tools or decision-support materials except those that will induce borrowers to come to them." Informing borrowers of their qualifications on the Internet, banks have decided, doesn't help "their bottom line," he says. The logic is that borrowers may easily take what they've learned and use it to apply for a similar loan at a competitor.
In other words, if the bank only reveals to a borrower that he qualifies for a loan during one-on-one engagement, then "the loan originator has first dibs on the deal."
Thus, Guttentag's tool could loosen lenders' clutch on mortgage qualification standards. The service is part of a larger loan origination network that he is developing which is scheduled to launch before the end of the year.
Guttentag has run his website, which offers a trove of articles and how-to manuals on borrowing as well as opinion pieces on market trends, for well over 10 years. He also writes a weekly column for InmanNews.com.
New Mortgage Tool Can Help Avoid Pain, Cost of Rejection
FHA Conforming Loan Limit: $729,750
Sq. Ft.: 1,250
As you might expect in the country's most expensive city, New York residential real estate has the highest conforming loan limit allowed under law, $729,750. While in the chicer parts of Manhattan that'll get you beans, if you're willing to live a little south of the action, you can snatch up an apartment like this three-bedroom -- for only 3.5 percent down.
The country's second biggest -- and notoriously traffic-plagued -- city is also just about as expensive as it gets. Awesome views of Beverly Hills, Wilshire Blvd. and the mountains beyond are the highlight of this classy apartment.
This apartment's building is set on a 3.5 acre lot that offers a pool, tennis court and fitness center. There's also valet parking and a concierge. But if you have pets... well, that's OK! The listing boasts of the building's "rare pet friendly environment."
Chicago's conforming loan limit is substantially lower than those of Los Angeles or New York. At $409,000 this duplex flirts with its FHA-loan ceiling. The apartment's kitchen has a cherry-stained inlay floor with a breakfast bar.
Our country's fifth largest city doesn't have property values as high as you might think. The relatively low median sale price of $305,000 pulls the FHA conforming loan limit down to $420,000. That delivers one bedroom and one bathroom in the case of this contemporary apartment. Is the stunning skyline looming outside the apartment's floor-to-ceiling windows worth that sum? Your call.
The Loan Star State's real estate comes pretty darn cheap and Houston dirt is no exception. The FHA will only insure your loan up to $271,050. But, considering bang-for-your-buck value in the state, that means the government will sponsor some pretty comfortable digs. This 2,791-square-foot traditional home offers four bedrooms on its well-landscaped plot. If the place strikes a chord with you, be sure to make the open house this weekend. See the listing for details.
Think back to that stylish Philly apartment. You know, the one-bedroom that cost in the neighborhood of $400,000? Now consider that this home's living room alone probably comes somewhere close to rivaling that apartment in total size. A reminder of just how much location determines value.
Located on a cul-de-sac, this Phoenix home offers four bedrooms. At $345,500 it's priced close to $150,000 above the median sale price, allowing relatively well-heeled borrowers to take out substantial loans for as low as, you guessed it, 3.5 percent down.
While the space may distinguish this home on paper, the home's interior really seems to set it apart. There are stone-arched doorways, exposed-beam ceilings and black hardwood floors. All of it potentially attainable for just 3.5 percent.
Ravaged by the foreclosure crisis, Jacksonville real estate values have plummeted over the last few years, allowing deals like this large single family. Priced at $379,900, the home is just shy of the point where the government steps back and says: "It's 20 percent from here on out."
Who knew you could find a glass-enclosed pool just yards from a pond on a property below $400,000. An amenity like this, plus the home's exquisite, varnished interior should be a reminder that today's market is, undoubtedly, a buyer's one. Worried you're not up to financial snuff? In case you didn't hear, you can buy a lot of homes like this one for just 3.5 percent down.