Lenders looking for larger down payments

Using the terminology of cards, golf and Warren Buffett, mortgage lenders in today's market want to see borrowers have "more skin in the game" to increase the likelihood that they will repay their loan, according to Greg McBride, senior financial analyst with Bankrate.com. So they are asking for larger down payments.

In this way, the lender has less risk.

And you can't blame them. The years of practices approaching "handshake loans" where the lenders trusted borrowers to pay back what they owed just because they smiled and said they would do so are in the past.

"Mortgage rates have dropped dramatically in recent months for many categories of loans and that has opened up opportunities for lots of people," explained McBride.

But that is not true across the board, he added. Mortgage lenders want a minimum of 30 percent down on a second home. Mortgage insurance companies won't go near most condominiums, so 20 percent down payments are necessary so that such insurance is not needed. Jumbo loans (over $417,000 in the Chicago area) carry interest rates of 7 to 8 percent instead of the lower 5.25 percent being touted for conforming loans of under $417,000. And home equity loans, which are no longer in favor, carry interest rates of 8.5 percent, while home equity lines of credit are being charged 5.5 percent.

Is it difficult for qualified buyers to get a mortgage today?

"You can get a very good mortgage in the Chicago area if you are looking to borrow $417,000 or less, have money for a good down payment, can provide proof of income and have a good credit rating," McBride said.

"But the threshold to get the best interest rates continues to rise as we flow back to a practice that was standard in years gone by," he continued.

Borrowers once again must be able to prove that they are in a position to pay back the money they are borrowing. So they have to show that in addition to their down payment, they also have some additional savings to fall back on if they have unplanned expenses.

"Unless you can prove that you have some wiggle room with extra savings, you won't be endearing yourself to lenders," McBride admitted.

How can you make yourself look like a better risk to a potential lender?

"What you do over time is what matters," McBride explained. "I would suggest that you pay down your debt, increase your savings and increase your credit score. Do not open or close any credit cards because that can adversely affect your debt-to-available credit ratio and you will look as if you are using a higher percentage of your available credit."

What is the current state of the mortgage market?

"The pendulum had swung way too far to the side of easy credit. Anyone with a pulse could get a loan for awhile there," McBride said.

"And now the pendulum has swung to the restrictive side. Lenders are making sure that loans are soundly underwritten and there is nothing wrong with that," he continued.

The traditional catalysts for defaults on mortgages have always been illness, job loss and divorce, according to McBride. But thanks to the easy credit of the last few years, recent foreclosures have come because people just weren't qualified to own the homes they had purchased.

"We will, unfortunately, continue to see foreclosures, however, because of the awful shape the economy is in," he explained. "And it will have nothing to do with whether or not the loan was well written. It will be back to the traditional reasons, with an emphasis on job loss."

How will President Obama's mortgage and stimulus packages change the overall mortgage situation?

"The plan has some good things and some holes," McBride said. "For instance, it won't solve the problem that people with little or no equity in their homes are unable to refinance. People who are under water by six figures or more can't refinance under the current guidelines. Yet if they allowed them to do that, those homeowners could save a couple hundred dollars a month that they could put back in the economy by spending it on other things.

"I feel we need a national forbearance program for the unemployed. For someone who has made their mortgage payments faithfully up until they lost their job, the banks should give them the benefit of the doubt. Let them get back to work and then revisit the mortgage payments," he suggested. "I believe in six to 12 months we will look back and wish we had done that."

McBride is also distressed that the Obama administration and Congress didn't close a troublesome loophole. People who withdrew equity from their homes to buy big screen televisions and other luxuries and are now under water on their mortgages are currently eligible for taxpayer-paid assistance. He feels those people, where possible, should have to relinquish the luxuries they irresponsibly purchased to get the government help.

"That kind of thing was far more prevalent than people realize or want to admit," McBride stated.

What do you see in the future?

"When the dust settles, borrowers will once again have to qualify for their mortgage and bring money to the table in the form of a substantial down payment," he explained.

"Down the road I foresee higher fees and interest rates because I think that inflation will be coming and when you have inflation, you also get higher interest rates," McBride stated.