In theory, this should be a great time to buy a home. Prices have dropped some 30 percent on average across the nation since their peak in 2006, and interest rates have hit historic lows.
But while this is still considered a "buyers' market," people looking to get into new homes are running into some serious obstacles. Lenders are coming up with new restrictions that are making it difficult for buyers to get financing.
"Clearly, the financial regulators are looking over lenders' shoulders a lot more than they were four or five years ago," says Paul Bishop, vice president of research at the National Association of Realtors. "But to a large degree, lenders are also trying to avoid getting burned again."
Delays And New Hurdles
Five years ago, just about anyone could qualify for a home loan. Now, we're at the other extreme.
The loan approval process, which in 2004 or 2005 might have been wrapped up in a day or even within hours, now takes much longer. Federal regulators are demanding that documentation be checked much closer to settlement -- the final sales date on the property.
Settlement dates are being delayed by up to two weeks because of the extra hoops that lenders now must jump through. Private lenders are creating their own obstacles, as well. They're waiving fewer credit and payment requirements than they did a few years ago and are continually laying down new tripwires that can foul up a home purchase.
Lenders want to know how much money you have, and where it's been. That is their proper role, which was widely neglected during the boom.
But, at least from the perspective of those who work in real estate, the restrictions have gone beyond proper to the picayune. There are even anecdotal accounts of lenders asking newlyweds who collected cash at their wedding to produce letters from all their guests saying how much each may have contributed.
Lenders On Defense
If you're moving to a new area -- always a popular reason to buy a new house -- you may have to plan on renting for a while first. Starting this month, some lenders have begun refusing letters from employers or even contracts as proof of future income. They demand pay stubs, which you won't acquire until you've already moved to the area and spent some weeks on the job.
Last month, many lenders started running credit checks on borrowers the day before settlement. Lenders will let you know ahead of the closing date whether your loan has been approved. But now they're double-checking that you haven't made any big purchases in the meantime.
Buying a new car -- or even ordering lots of furniture with credit cards before moving in -- may throw off your income-to-debt ratio, meaning your home loan might be canceled at the last minute.
"In a defensive move against the actions demanded by the regulators," says Jay Brinkmann, chief economist for the Mortgage Bankers Association, "lenders are now going the extra mile because they know they can be nitpicked years later."
Casting A More Skeptical Eye
The days of easy credit have been over for a while now. During the housing boom -- and this was a big cause of the boom -- lenders issued mortgages to people with inadequate incomes and poor credit. They gave out loans that not only covered but exceeded the home purchase price. They allowed speculators to leverage equity in homes they had owned only a month or two, granting them loans on a second or third or fourth property.
After the resulting housing bust that was a prime contributor to the global recession, it was clear lenders and regulators would need to step up their games. "If it's a case where the borrower is trying to cover something up, perhaps those loans shouldn't be made," Brinkmann says.
Buyers, for their own sake, should be certain they have the wherewithal to sustain mortgage payments over the long haul. Taking on excessive debt is what got the housing market and the broader economy into trouble in the first place.
But years after the bust, some worry that the pendulum is still swinging too much toward caution. "It's not surprising in the least that the government and private lenders are trying to protect themselves after the wild lending party we had," says Mike Larson, a real estate and interest rate analyst at Weiss Research, an investment firm in Florida. "But that means in some cases you're now going to have trouble qualifying for a loan unless you fit the plain-vanilla profile."
Does It Make A Difference?
Demands for more paperwork and greater scrutiny of it are not the primary reasons that housing market is stuck in the mud. High unemployment has a lot more to do with it. And the housing market entered into a trough once a generous federal homebuyers' tax credit expired April 30.
In May, contracts to buy previously owned homes dropped 30 percent from April -- the biggest decline since 2001. New-home sales were down by 33 percent.
Stricter lending requirements -- and the uncertainty caused by potential last-minute cancellations -- aren't helping sales any. They're also keeping many people from trying to refinance their homes, despite historically low rates.
Some people are in a position where they have to move and want to buy a new home. They won't be stopped by these new regulations, although they may be inconvenienced.
Where there's a real effect on sales, says Bishop of the Realtors association, is among people who have a choice about buying. For instance, someone may be financially qualified to trade up into a bigger home, but will decide it's not worth the hassle.
"If the process is so onerous, they may decide it's really not worth it because they don't have any certainty about how it's going to come out the other end," Bishop says. "It's proving to be a headwind for people who are in the market."
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