Specifically, the FHA is proposing to update the combination of credit and downpayment requirements for new borrowers, reduce seller concessions from 6% to 3% and tighten underwriting standards for manually-underwritten loans.  The changes also seek to reduce the share of the home sales price that sellers are allowed to contribute at the closing table to offset the buyers’ costs. The current share of 6% “exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value,” the FHA said in a statement today. The proposed change would reduce seller concessions to 3%, which the FHA said would bring it into conformity with industry standards.  The proposed FHA policy updates also require lenders, during the underwriting process, to consider compensating factors that are “the best predictive indicators of loan performance” — credit history, loan-to-value ratio, debt-to-income ratio and cash reserves.

Chris McLaughlin **************

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But when he approached his lender, Charlotte, N.C.-based Bank of America, about refinancing his existing mortgage or qualifying for a new loan, McLaughlin felt like a brand-new customer just off the street.

“They said new banking laws required that I jump through all the hoops, which I thought was a little odd because my record with Bank of America had been good,” said McLaughlin. “All the new paperwork, all the new guidelines they were now required to administer. All that was going to complicate it.”

McLaughlin wasn’t being singled out—he was simply finding out firsthand how the residential mortgage industry has changed since the housing meltdown. After a period when too many lenders focused just on getting people into homes—and not on whether they could afford them—the pendulum has swung back in the other direction.

The number of mortgage products offered to consumers has shrunk, while the amount of income documentation required of borrowers has increased.

“It’s going back to how things were done 10 years ago,” said Jim Bennison, a senior vice president with Raleigh-based Genworth Mortgage Insurance.

The new landscape can be particularly jarring for borrowers used to the recent go-go years, when some lenders required little proof of a borrower’s income and liabilities and enticed them with a range of exotic loans with variable interest rates.

The underwriting standards for borrowers are now being dictated almost entirely by three government entities that have come to dominate the mortgage market: the Federal Housing Administration, Fannie Mae and Freddie Mac.

A bank today is highly unlikely to issue a mortgage that won’t be guaranteed by one of these three. A few years ago, a buyer might have found the house of her dreams and then worried about how to finance it. Now, getting pre-qualified for a loan should be one of the first steps.

“People need to call a mortgage professional earlier in the process than they think,” said Todd Barbour, vice president of Meridian Residential, a mortgage company in Cary, NC. “The very moment you think, ‘I might want to buy a house,’ someone like me should be the next phone call.” Given how severe the housing downturn has been, Barbour said, many people assume they won’t be able to get a loan. That’s a mistake, he said, because there are good loans available for qualified buyers and interest rates are at historic lows.

One of Barbour’s clients recently purchased a home for $285,000 in Wake Forest, NC. The couple got a 30-year mortgage with an interest rate of less than 5%. “It went crazy smooth for us,” Lauri Moore said. “It was literally a miracle how smooth it went.” The Moores had great credit and made a 20% down payment, something not all buyers are in a position to do.

One option that has become attractive, particularly for first-time home buyers, is FHA loans, which require borrowers to put down just 3.5% if they have a credit score of 580 or above. By comparison, to qualify for a low-rate conventional mortgage, a buyer will need a credit score of about 740. The number of loans being insured by FHA has exploded in the past three years as Wall Street stopped buying up mortgage-backed securities.

FHA loans don’t require a borrower to have private mortgage insurance, but anyone else who can’t put 20% down is typically required to get PMI. For a borrower such as the Moores, PMI would have come to about $200 a month, Lauri Moore said. PMI providers such as Genworth offer borrowers additional benefits such as assistance in the event of unemployment and help in reworking mortgages to help families avoid foreclosure.

During the housing boom, many borrowers avoided having to buy mortgage insurance by getting a so-called piggyback loan, which is a second mortgage taken out at the same time as a first mortgage. Today, fewer banks are offering customers piggyback loans, which typically have a higher interest rate than the first mortgage.

Although borrowers should pay close attention to their credit score, that number is just one of several indicators a lender will use in evaluating a borrower. Lenders today want documentation of a borrower’s income for at least the last two years plus information about total debt, which includes any assessments, credit card balances and auto loans as well as how much cash is available for a down payment.

“People have to be organized,” said John Cross, Bank of America’s regional sales executive for North Carolina. “That means keeping copies of your tax records, having access to your bank statements, your W-2s. A little bit more fiscal responsibility has probably been put on the borrower.”

Both first-time home buyers and repeat buyers should expect lenders to take into account what their loan-to-income ratio is.

Mark Goldhaber, a Genworth senior vice president, said from 2002 to 2006 it was not unusual to see homeowners whose total debts, including their mortgage payment, took up 55% or more of their income. Today, banks want total debt to be in the 40-45% range, which is in line with historical lending standards.

“A consumer who is educated and informed is really the best underwriter of all,” Goldhaber said. “If you know what you can afford, then you’re not going to get yourself into too much house.”

(c) 2010, The News & Observer (Raleigh, N.C.).

Distributed by McClatchy-Tribune Information Services.

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