By Lisa Green
October 05 2011
You hear a lot of reference to go back to mortgage lending requirements of 20 to 30 years ago. What does that mean exactly? Mostly this means that consumers would have to document all income, assets, employment and credit histories, as well as fit into ratio guidelines for their total housing payment and total debt payment. While I’m a big fan of documenting, what those requirements do not take into account are the complexities of financing in 2011.
In the late 1980s, buyers usually had one, maybe two, banking relationships where they had their down payment and closing costs saved. These could be easily documented with bank statements that were always paper and only one or two pages long. In addition, jobs were fairly stable with the majority of people working for salaries with the exception of truly self-employed individuals. Today, we have many hourly and contract workers who believe they are very similar to someone who gets a salary. However, lenders need to see a two-year history for the most part to consider the income needed to qualify for a mortgage.
Let’s also talk about credit. Back then there were no credit scores, you had one credit report which showed your credit history. This was very easy for underwriters and loan officers to review and see if you were qualified. Also, even though there was a time in the 1990s where housing values fell in some areas of the country, it was not more than 10 percent. Therefore appraisals were not scrutinized to the level they are today.
If you also think to add all of the additional “fixed” expenses we now have today like cell phone plans, cable TV and Internet, and the high cost of health insurance premiums, we actually have less income to devote to our housing. Although these are not formally included in any mortgage calculation, it is something to be considered when looking at a buyer’s ability to make a mortgage payment.
Finally, we are in an unprecedented period of regulation and enforcement in the mortgage industry. Where in the past the market could pull back on underwriting criteria and then slowly re-introduce some relaxing of guidelines, with the Dodd-Frank Bill the government looks like it is making sure the private market cannot make these types of decisions.
S, as I see it, lending is not anything like what it was in the late 1980s and early 1990s. It is important for everyone to understand the lending environment we are living in today.