Mortgage Market: Current Trends And Challenges

Getting a mortgage in the current economic climate is a challenging endeavour. Since the global financial crisis of 2007, lenders have tightened their standards, making it harder for prospective borrowers to qualify for loans. The process involves rigorous scrutiny of one's finances, credit history, income, assets, and debt to ensure loan affordability and compliance with lender requirements. While this stringent approach protects existing homeowners and minimises the risk of defaults, it also limits opportunities for individuals with poor credit. The rise in interest rates has further reduced the number of people eligible for mortgages, with lenders exercising caution in anticipation of a potential economic downturn. As a result, only the most qualified buyers are securing mortgages, and even they face a labour-intensive journey to loan approval.

Getting approved for a mortgage

Prequalification and Preapproval

Before approving a mortgage, lenders typically offer prequalification and preapproval processes, which are important steps to establish your eligibility and purchasing power. Prequalification is a quick and convenient way to get an estimate of the amount you can borrow based on basic information like your income and expected down payment. This can often be done online and helps you understand your financial options and work with your lender to identify the right mortgage fit. Preapproval, on the other hand, is a more rigorous process that involves submitting additional financial documentation, including proof of income, assets, employment, and credit score. It provides a more specific estimate of the loan amount you can obtain and is valid for a certain period, usually 60 to 90 days. Preapproval strengthens your position when making an offer on a home as it demonstrates to sellers that you are creditworthy and have the financial means to secure a loan.

Factors Affecting Mortgage Approval

When you apply for a mortgage, your application is reviewed by an underwriter who assesses various criteria to determine your eligibility. These criteria include:

• Income and Debt: Lenders evaluate your income to ensure it is sufficient to cover the mortgage payments and your other monthly expenses. They consider your debt-to-income ratio (DTI), with most lenders preferring a ratio of 36% or lower.
• Credit History: Your credit score and credit report are critical factors in assessing your creditworthiness and financial responsibility. A higher credit score indicates lower lending risk and improves your chances of approval.
• Down Payment: The size of your down payment impacts the loan-to-value (LTV) ratio, which is the assessment of lending risk. A higher down payment results in a lower LTV, making the loan less risky for the lender. A down payment of less than 20% typically requires private mortgage insurance (PMI), increasing your monthly payment.
• Home Value: The underwriter evaluates the value of the home you are purchasing through a professional appraisal to ensure it meets or exceeds the purchase price and fits within the loan program guidelines.
• Reserves: Lenders may require you to have set aside a certain number of monthly mortgage payments as reserves to cover emergencies or unforeseen events.
• Loan Program Guidelines: Different loan programs have specific guidelines regarding eligibility, interest rates, and repayment terms. These guidelines encompass factors such as income thresholds, credit score requirements, and down payment expectations.

Choosing a Mortgage Lender and Type

It is essential to shop around and compare rates and terms from multiple lenders, including credit unions, banks, mortgage-specific lenders, online lenders, and mortgage brokers. The most common mortgage types are 15-year and 30-year fixed-rate mortgages, but there are also adjustable-rate options and shorter or longer-term lengths. The type of mortgage you choose will depend on your financial situation, preferences, and eligibility.

Supporting Documentation

When applying for a mortgage, you will need to provide various supporting documents to verify your financial situation and eligibility. These documents typically include bank and investment statements, tax returns, proof of employment, and identification. The underwriter will review these documents to ensure they meet the loan program guidelines and make an informed decision about your loan approval.

The impact of the 2007 financial crisis

Mortgages are loans used to buy homes or borrow money against the value of a home you already own. The property itself serves as collateral for the loan. In the event that a borrower falls behind on their loan payments, the lender has the right to repossess the home and sell it to recoup their losses.

The 2007-2010 subprime mortgage crisis had a significant impact on the mortgage market and the global economy. It was caused by a combination of factors, including:

• Losses on subprime mortgage securities: Many lenders offered loans to borrowers who were unable to keep up with their repayments, leading to high delinquency rates and mass foreclosures. This ultimately devalued housing-related securities.
• A run on the shadow banking system: The complex and interconnected nature of off-balance sheet arrangements made it difficult to reorganise them, leading to government bailouts of financial institutions.
• Foreign investment: The U.S. received large amounts of foreign investment from fast-growing economies in Asia and oil-producing/exporting countries, which contributed to the housing bubble.
• Speculative borrowing: This contributed to rising debt and an eventual collapse of asset values.
• Housing bubble: The bubble was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates. As housing prices fell, global investor demand for mortgage-related securities dropped, leading to a cascade of selling and further lowering their value.

Conforming vs non-conforming loans

Mortgages are loans used to buy homes or other types of real estate. The property itself serves as collateral for the loan. Mortgages are available in a variety of types, including fixed-rate and adjustable-rate, and from a range of lenders, such as banks, credit unions, and online lenders. The cost of a mortgage will depend on the type of loan, the term (usually 15 or 30 years), and the interest rate charged by the lender.

Now, let's delve into the topic of conforming vs. non-conforming loans, which are the two primary categories of mortgages.

Conforming Loans

Conforming loans adhere to the guidelines and criteria set by government-sponsored enterprises (GSEs), specifically Fannie Mae and Freddie Mac. These loans meet specific standards related to loan size and the borrower's credit score. Conforming loans typically carry lower interest rates compared to non-conforming loans, making them a more affordable option for borrowers. The FHFA (Federal Housing Finance Agency) updates the conforming loan limits annually, and these loans are standardized in terms of requirements and conditions.

Non-Conforming Loans

Non-conforming loans, on the other hand, do not meet the criteria set by GSEs. These loans often exceed the maximum loan limits set for conforming loans and may have larger loan amounts. Non-conforming loans, also known as jumbo loans or portfolio loans, usually have stricter requirements, including higher down payment expectations and more stringent underwriting criteria. They may offer more flexibility for borrowers with unique financial circumstances. While non-conforming loans used to carry higher interest rates due to the increased risk, this is no longer a standard practice.

Fixed-rate vs adjustable-rate mortgages

Mortgages are loans used to buy homes or other types of real estate. The property itself serves as collateral for the loan. There are two main types of mortgages: fixed-rate mortgages and adjustable-rate mortgages (ARMs).

With a fixed-rate mortgage, the interest rate remains the same throughout the term of the mortgage. This means that your monthly payments will remain the same, making budgeting easier. The main advantage of a fixed-rate mortgage is that the borrower is protected from sudden increases in monthly payments if interest rates rise. Traditional lenders offer fixed-rate mortgages for a variety of terms, the most common of which are 30, 20, and 15 years. The 30-year mortgage, which has the lowest monthly payment, is often a popular choice. However, the longer your mortgage term, the more you will pay in overall interest.

On the other hand, adjustable-rate mortgages (ARMs) have interest rates that can change based on broader market trends. The interest rate on an ARM may increase or decrease in tandem with broader interest rate trends. The initial interest rate on an ARM is usually lower than that of a comparable fixed-rate loan, and it may stay the same for months, one year, or a few years. After this introductory period, the interest rate will change at regular intervals, and your monthly payments are likely to increase.

ARMs are more complicated than fixed-rate loans, and it is important to understand some basic terminology before deciding between a fixed or adjustable-rate mortgage. For example, adjustment frequency refers to the amount of time between interest rate adjustments (e.g. monthly, yearly, etc.). Adjustment indexes are benchmarks that interest rate adjustments are tied to, such as the interest rate on a particular asset or a specific index. The margin is the percentage above the adjustment index that you agree to pay when you sign your loan.

Both fixed-rate and adjustable-rate mortgages have their own benefits, and the best option for you will depend on your financial situation and preferences.

The role of a co-signer

A mortgage is a loan from a lender that is used to buy homes or other types of real estate. The property itself serves as collateral for the loan. Mortgages are available in a variety of types, including fixed-rate and adjustable-rate, and can have terms ranging from 5 to 40 years or more. The cost of a mortgage depends on the type of loan, the term, and the interest rate charged by the lender.

Now, what about the role of a co-signer in a mortgage? A co-signer is someone who agrees to take on the financial responsibility of the primary borrower's loan if they can no longer make payments. In other words, if the primary borrower misses payments or defaults on the loan, the co-signer is legally responsible for repaying the debt. It is important to note that a co-signer is not just a character reference but a legally binding contract. While co-signing can help the primary borrower qualify for a loan, it also puts the co-signer's finances and creditworthiness at risk. Co-signing a mortgage loan can make it easier to get approved for a mortgage, especially if the primary borrower has bad credit or insufficient income. However, co-signers should carefully consider the risks and obligations before agreeing, as late or missed payments by the primary borrower can negatively impact the co-signer's credit report.

From a legal perspective, there is a distinction between a co-borrower and a co-signer. A co-borrower will typically appear on the property's title, while a co-signer will not. Being on the title comes with certain rights and responsibilities, such as potential liability for injuries that occur on the property. It is important to seek legal advice before agreeing to co-sign a mortgage loan to fully understand the risks and obligations involved.

In summary, the role of a co-signer in a mortgage is to provide financial assurance to the lender by agreeing to take on the responsibility of making payments if the primary borrower is unable to do so. Co-signing can be beneficial for the primary borrower, especially if they have a weak mortgage application, but it also carries risks for the co-signer in terms of their finances and creditworthiness.

Frequently asked questions