Reasons it Will Be Harder to Get a Mortgage in 2011

Find out what options you have for getting a mortgage in 2011.

The mortgage and housing markets have been through difficult times over the last few years. Credit, debt-to-income limits, and down payment requirements all became more rigorous. Here are several reasons why mortgage qualifications guidelines will remain stringent this year.

1. Rising mortgage rates Although mortgage rates are still low by historical standards, most economists predict that rates will increase throughout the year. Some experts think the 30-year fixed-rate mortgage could be 5.5 percent by the end of 2011. Higher rates can affect loan eligibility by increasing the monthly mortgage payments and borrowers’ ability to qualify for loans.
2. New Price Adjustments Fannie Mae increased costs for borrowers with lower credit scores, less home equity, and second mortgages when it changed what it calls its loan-level price adjustments. While borrowers with excellent credit and significant equity in their homes are unaffected, lenders will pass along those greater costs to most borrowers, prompting their mortgage rates to increase anywhere from 0.125 to 3 percent.
3. Lower conforming limits The conforming loan limit in high-cost areas, which include densely populated areas around major cities like New York, Washington D.C., San Francisco and Los Angeles, is scheduled to expire Sept. 30, 2011 and drop from $729,750 to $625,500. Because Fannie Mae, Freddie Mac, and the FHA cannot guarantee mortgages over the conforming loan limit, mortgages over the limit will face higher interest rates and tighter restrictions.
4. Regulatory Uncertainty Congress may consider restricting what kinds of mortgages Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), which back most mortgages. That may mean higher rates or tougher qualification guidelines.
5. Fewer Lenders The FDIC shut down 157 failed banks last year and expects to continue taking over banks in 2011, although the pace of bank closings will slow. Fewer lenders mean less competition and fewer options for mortgage borrowers.
6. Inadequate home equity As home values in many areas fell, some homeowners found that they don't have enough home equity to refinance and take advantage of low mortgage rates. Although home prices have stabilized or begun to increase in some areas, an expected increase in foreclosure sales may put home values in some markets under stress.
   Because appraisers can mistakenly compare home values to foreclosures or other distressed sales it's important to make sure they complete an accurate valuation of your home. Tips for ensuring an accurate home appraisal.
7. High credit scores More consumers are facing credit problems due to unemployment, under-employment and lower home values, but credit score requirements remain high. While a 580 credit score was acceptable a few years ago, Fannie Mae and Freddie Mac require at least 620 scores for all programs except the Home Affordable Refinance Program. FHA home loans require a minimum credit score of 640. Tips for improving your credit score.
8. Low Debt-to-Income Ratios Debt-to-income (DTI) ratios, monthly debt payments relative to income, are still high. While it used to allow DTIs up to 55 percent, Fannie Mae now requires typically requires at least 45 percent. Freddie Mac wants at least 50 percent DTI.
   To compute your DTI divide your monthly debt payments, such as credit card, car loan and other personal loan payments, by your gross monthly income. For example, if you make $10,000 per month, you used to be permitted to spend $5,500 per month on mortgage, taxes and insurance payments for a home. With a lower DTI requirement, that maximum housing costs decreased to $4,500 per month. Even worse, exceptions that permit borrowers to go over the limit for valid reasons have been curtailed.
9. High Down Payment Requirements Borrowers need a loan-to-value (LTV) ratio of 80 percent to obtain a mortgage without private mortgage insurance (PMI). The LTV shows how much home equity homeowners have. For example, if you purchase a home valued at $200,000 and make a $40,000 down payment, you have an LTV of 80 percent. If your LTV is over 80 percent, you may be able to qualify for a mortgage if you pay for private mortgage insurance.
   PMI companies and the property's location determine the credit score, DTI and LTV guidelines. For the best mortgage rates, borrowers paying MI should have a credit score of 660 or more and a DTI of 41 percent or less.
   In one improvement in lending requirements, Fannie Mae will allow LTVs of up to 97 percent for home purchases and rate and term refinances for borrowers with good credit.

While lending guidelines will probably remain stringent through 2011, low mortgage rates are available to home buyers and refinancing homeowners who can qualify for mortgage loans.

For a free mortgage pre-approval and an exact rate quote to help you purchase your next home, please email us or call us at 1-877-868-2503.

To see the current mortgage rates, visit our Current Mortgage Rates page.

For a free mortgage pre-approval and an exact rate quote to help you purchase your next condominium, please email us or call us at 1-877-868-2503.

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