It has never been easier to qualify for a loan

I have repeatedly stated how easy it is to qualify for a loan and have been bombarded with emails telling me what an idiot I am and that I obviously  know nothing about how difficult it is to qualify these days.  To support this case, every builder that reported earnings recently mentioned how difficult it is for buyers to qualify. Existing home sales released today talked about a cancellation rate of over 30%, mostly attributed to the difficulty of obtaining a loan.

Since it seems to be receiving so much attention, I would like to clarify my opinion.

In our entitlement society, everyone has been trained to assume that the irresponsible underwriting practices that pertained during the subprime era are the norm. If a borrower cannot get a loan because of bad credit, insufficient income, no downpayment or no documentation, then qualifications standards are too stringent. You hear the idea that it is difficult to qualify repeated so often that most assume that it  must be true.

Since the beginning of mortgage lending, buyers have prepared themselves for the purchase of a home.  First they saved up some money for a down payment, cleaned up their credit (although there's no reason why credits should not be clean to start with) and then budget for the expenditure.

An FHA mortgage today only requires 3.5% cash from the buyer, entails no closing costs and bears less than 4% interest for a 30 year fixed rate assumable mortgage.´ A household with an income of $2,000 per month  should qualify for a $100,000 loan. How much easier can it get?

How difficult is the documentation?  All it takes is two years of W2 documents or tax returns.  If you do not have that, you probably should not even be thinking about buying a house.  Granted that it would be more difficult if you are self-employed and may have tax returns that show little income because you have tweaked your P&L to the max.  As regards credit scores, even a FICO of less than 650 makes qualification possible.  What about a short sale on your credit report? You'll have to wait two years; in case of  a foreclosure, the waiting period is three years.

The fact that there are any rejections at all is because many hopeful buyers are simply not ready to take on the obligations. It would be evil to try to force loans on them and turn them into the next generation of mortgage slaves, essentially repeating the subprime fiasco. For anecdotal evidence, look no further than the home builders. They are past masters in manipulating the system. They usually have a few months to work on the buyers' qualification problems while the home is being built. When a builders fails to convert an order into a closing due to financing difficulties,  it usually means that the buyers are not even remotely qualified.

The reality today is that the new generation of buyers is burdened by student loans, struggling to make lease payments on the late model Beemer and cannot live without the collection of $60 t-shirts from Abercrombie and Fitch.

Lastly, these "stringent" underwriting standards have been in place for a few years now. Delinquency rates for these post subprime vintage loans are still way above 3% (a rough round number representing new delinquencies). Historically, a healthy mortgage market should have a less than 1% default rate for mortgages.  When are we going to accept that our household balance sheets are not what they used to be? Our government should stop encouraging consumption. If the government is not going to act responsibly, at least give the citizens have a chance to do so.

The bulls opine that there are all these qualified buyers sitting on the sidelines ready to jump in. I will believe it when I see it.

 

 


 

 

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3 Responses to “It has never been easier to qualify for a loan”

  • Kim Hackl:

    I wonder if citizens given a chance to stop consuming so much would do so. But I agree with your implication that we have a better chance at it than our governments do. Especially the Bernanke run Fed and their cheap money policies in order to “increase demand” (that is, get people to buy more stuff). Unfortunately, our standard of living has grown beyond our wealth to support it. Something has to give. We need to be satisfied with a lower standard of living or our governments are destroy us with a sea of debt.

  • worldend666:

    Would I qualify for a mortgage Ramsey? I am a non US citizen with no earnings history but I could buy the house cash.

    I find the US system of creditworthiness a joke. As I have never borrowed money in my life I do not have a credit rating and therefore I am a bad credit risk. The computer algorithms take one look at me and run for the hills, but as you say almost anyone with a couple years of earnings can be capitalized into a future income stream for 20 or 30 years.

  • Keith Weiner:

    Good point Ramsey. I reminds me of being in school. After taking an exam, some kids would say how hard it was and some would say how easy it was. The ones who said it was hard (usually) just didn’t study, didn’t know the material, and were unprepared.

    Today, with all of the government programs to push credit to every man, woman, and child, credit is “hard” to get like a good grade on a test in English Literature about the theme of _Lord of the Flies_.

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