Buyer's market tempered by tougher loan standards for riskier borrowers

Homebuyers looking to local banks for loans will have their creditworthiness held to higher standards than in years past, thanks to gun-shy investors.

Executives in charge of residential lending say investors underwriting mortgages are proceeding cautiously amid the global credit crunch and recent bloodletting on Wall Street. That means potential borrowers are facing tougher criteria in terms of credit scores and loan-to-value ratio, which evaluates whether the value of a home being purchased is enough to collateralize the loan.

A year and a half ago, borrowers with credit scores in the 650 to 680 range were not assessed risk-based points when they applied for home loans, said Marita Thomas, vice president of residential real estate at Empire Bank. But the threshold for escaping such scrutiny is now a credit score of 720 or higher, she said.

Lower credit scores mean more points, which manifest themselves differently in the loan terms, but they all end up on the borrower's bottom line.

"Lower-credit score borrowers are going to have to pay more in interest rates and fees ... and even what we used to think were good, strong credit scores are going to have to feel the effects of it," Thomas said.

Still, borrowers who look good on paper might want to take advantage of dipping rates on fixed mortgages.

The benchmark 30-year fixed-rate mortgage fell 22 basis points to 6.2 percent, and the benchmark 15-year fixed-rate mortgage fell 19 basis points to 5.95 percent for a $165,000 loan, according to an Oct. 8 national survey of large lenders by Bankrate.com.

Still, widely advertised mortgage rates make some assumptions about a borrower's credit rating and cash flow that don't always apply.

"They see these things on the Internet, and they don't realize that's with 20 percent down and a 780 credit score," said Carla Green, vice president of residential lending at Citizens National Bank.

Products roll with punches

The residential lending landscape in Springfield looks much different than it did a year ago, said Aaron Jernigan, senior vice president of mortgage banking at BancorpSouth. He said about half of the home loan products available then have fallen out of favor.

"Now there's a level playing field," he said. "For banks and brokers, it's full doc(umentation). You've got to verify income. You've got to verify your assets. It really takes us back about probably 10 to 15 years in lending."

On the other end of the spectrum, interest rates tied to fixed jumbo home loans - those greater than $417,000 that exceed limits set by agencies that buy, bundle and resell mortgages - are climbing again after dipping below 7 percent in September.

"There's just a lack of options for someone who wants a jumbo loan," Jernigan said. "What happened is the jumbo fixed-rate market (doesn't) securitize that product anymore with a bond that's sold on the secondary market."

Through one of its investors, BancorpSouth has been able to accommodate qualified jumbo borrowers seeking home loans up to $900,000 at a 15-year fixed rate of 5.875 percent with no points or prepayment penalties, Jernigan said. The bank also offers 5/1 and 7/1 adjustable-rate jumbo mortgages.

Jernigan said ongoing construction of high-end custom homes is still driving some of the demand for jumbo loans, although Thomas at Empire noted that appraisers are likely having a tougher time finding comparable real estate transactions amid the housing slowdown.

Real estate outlook

Realtors eager to help homebuyers take advantage of lower interest rates are doing what they can to help their clients find financing, said Carol Jones Realtor Miles Noennig, president-elect of the Greater Springfield Board of Realtors.

While they may be spooked by headlines about economic uncertainty, creditworthy borrowers still have options in the Springfield market, Noennig said. In some cases, though, they'll need to apply with more lenders to find the loan terms that are right for them.

"It might be just a little bit tougher, but I know that there are lenders out there that have funds to lend and are perfectly ready and willing to do so," Noennig said before dispensing some advice. "There's certainly an inventory of homes at every price point, but they need to make sure their credit is as clean and as sparkling as possible."

Noennig said Realtors are likewise acquainting themselves with the various lending products gaining popularity under the new credit paradigm. As the housing market recovers, though, investors may decide to relax lending standards.

"Historically, the credit markets will tighten for home loans. They may charge a few more points or tighten the credit standards," Noennig said. "And then - over a period of years - it gets loosened again. It's pretty cyclical, but this is a different economic time than we've faced in recent years, so it's going to be pretty hard to predict."

The good news is that property values in Springfield aren't plummeting as they have in larger markets wracked by foreclosures.

"Some of the different areas are considered declining markets, and there's different (lending) rules for those markets," noted Green of Citizens National. "We're not in that market."

Options emerge

Federal Housing Administration loans have emerged as an effective lending mechanism for potential borrowers with less-than-perfect credit and limited cash down, said Green. Those loans typically require a down payment of at least 3 percent and can accommodate borrowers with a credit score as low as 580, she said, noting that FHA loan interest rates have remained within an eighth to a quarter percentage point of their conventional counterparts.

BancorpSouth also has seen an increase in bond-money loans available to qualified first-time homebuyers through the Missouri Housing Development Commission, Jernigan said.

The commission's First Place Loans program provides cash assistance for down payments and closing costs on loans up to $237,000 for a single-family home. The interest rate for a 30-year, fixed mortgage with cash assistance through the program was 6.7 percent as of Oct. 9. Local banks certified to handle the bond-money loans include BancorpSouth, Great Southern and Liberty.[[In-content Ad]]