Mortgage Guideline Changes - A Summary Of Changes Over The Last Few Years That Consumers Need To Know

Real Estate Agent with Briggs Freeman Sotheby's International Realty 0596165

Since the beginning of the financial crisis, several significant changes have occured with mortgage guidelinesA summary of these mortgage guideline changes is imperative to helping consumers understand what changes that have taken place over the last few years may affect their ability to obtain a new mortgage loan

Contrary to popular belief, the guideline changes have involved a lot more than just higher credit score requirements.  In fact, one could argue that credit scores have perhaps been the least significant factor that has changed.   This assumption is perhaps my biggest reason for writing this article.  Many buyers I encounter today, especially those who monitor their credit score and know they have good credit, are under the false impression that mortgage guidelines are essentially the same as they were a few years ago with the exception of higher credit score requirements.  This leads them to assume that they will automatically be approved for a loan. 

Perhaps they were able to obtain a mortgage quite easily a few years ago, or perhaps they simply do not understand that credit score is only one of a long list of factors that mortgage lenders consider.  The main reason for their misunderstanding is because the media has oversimplified the complexity of the mortgage crisis and constantly portrays it as being caused by "banks giving loans to people with bad credit".   So it's logical to most people to conclude that credit score requirements have been the only factors that have changed. 

Unfortunately this is far from the case.  That doesn't mean that it's impossible to get a loan nowadays, but buyers need to be aware of the other changes that have taken place with mortgage guidelines.  Simply having a good credit score no longer guarantees a loan approval like it did a few years ago

The subprime mortgage market at one point made up more than half of the mortgage market in the US.  Today, it accounts for just a small percentage.  Fannie Mae, Freddie Mac and Ginnie Mae now account for over 90% of the mortgage market, with the remaining share consisting largely of jumbo loans held in bank portfolio and hard money loans, which are private mortgage loans made by a variety of different entities. 

In other words, FHA, VA, USDA and Fannie/Freddie Conventional loans are about the only game in town, aside from jumbo loans and the small share of hard money lenders that make loans on their own terms.  Of course, hard money lenders usually demand much higher fees and interest rates than the government agencies since they are able to provide a loan when nobody else will. 

The government agencies guarantee loans made by banks, they do not loan the money themselves directly to consumers.  But they purchase the loans from the banks once the loan has been made to the consumer.  So banks will typically not lend outside of these guidelines since they do not wish to hold these loans on their books.  They would rather transfer the risk and make loans to new customers by sellling them to Fannie Mae or Freddie Mac.   

Here's a summary of changes that have taken place in mortgage guidelines over the last few years:



Stated income loans were originally designed as a way to simplify the mortgage approval process for self-employed borrowers who had to provide a significant amount of paperwork (tax returns, etc).  Over the last several years, many lenders dropped the down payment requirement for stated income loans from 20% all the way down to 0% while at the same time eliminating the requirement to actually verify the borrower had a business in the first place. 

Then came "no doc" loans, where the borrower simply had to provide their name and a social security number.  At one point, a buyer with a 680 credit score could purchase a $750,000 home with no money down with no verification of employment, income or assets.  Needless to say, these loans mostly resulted in foreclosure and massive losses to the investors. 


Most states have passed laws that completely outlaw stated income loans.  Furthermore, banks realize that loans made to individuals that can't document their income through traditional means (W-2's, tax returns, etc) have a much higher instance of foreclosure.  Fannie Mae no longer purchases stated income loans.  The only option most homebuyers have who can't document their income is to seek financing from a hard money lender who is willing to take the higher risk.  The rates and fees are typically much higher than government insured loans. 


A few years ago, subprime loans allowed buyers with credit scores as low as 560 (in some cases 500) to obtain a 100% loan.  Also, there was a loophole in the FHA guidelines that allowed buyers to obtain a "gift" from the seller to circumvent the 3% down requirement.  Fannie Mae also had a variety of 100% loan programs. 


Fannie Mae now requires a minimum of 3% down.  FHA down payment requirements have been increased to 3.5% and the loophole allowing sellers to pay their down payment has been eliminated.  100% subprime loans have been gone for several years now, and 100% stated income loans have been retired to the graveyard of history. 

PROGRAMS THAT STILL ALLOW 100% FINANCING include the USDA loan program and the VA loan program.  Some government grants also may be used for down payment, but these usually have very strict income requirements.  The USDA loan has some specific loan guidelines and, more importantly, geographic restrictions.  100% VA loans are still available to qualified veterans.  And surprisingly, the guidelines for VA loans have changed very little.  This is likely due to the fact that VA analyzes income more closely than other types of loans, which has led to fewer losses compared to subprime and conventional loans.   


A few years ago, most buyers who wanted to purchase a different home (move-up) or even downsize to a smaller home would simply lease their current home and provide a copy of this lease to their lender to offset their mortgage payment.  Then once the foreclosure crisis picked up steam, lenders began to notice that a significant amount of foreclosures were occuring on homes where buyers had purchased another home and simply let the first home go into foreclosure.  This was even happening on many buyers who had perfect credit.  This tactic, known as "buy and bail", began causing a massive amount of losses to mortgage companies.  Even many buyers who intended on keeping their home as an investment property or who were planning to sell the home shortly after closing on the new one began falling behind because of a slowdown in the market. 


Homebuyers who want to keep their current home may not be able to simply show a lease to offset the payment.  Fannie Mae, in most cases, requires the buyer to prove they have at least 30% equity in their current home in order to offset the current payment with a lease.  They also may be required to show at least six months payment reserves for both the current and new home.  FHA also requires 25% equity, unless certain conditions exist (such as moving to an area that's not within reasonable commuting distance).  Proof that the first month's rent and/or security deposit has been obtained is often required as well.  Homebuyers that are upside down on their current home or who do not meet these equity requirements may still be able to obtain a new loan provided they qualify with both mortgage payments


During the subprime boom, many lenders relaxed or completely eliminated requirements that borrowers have reserves in the bank after closing.  Statistically, buyers are much more likely to have problems paying their mortgage without at least some cushion to fall back on in case of a financial hardship, such as job loss, etc. 


While most loans do not have specific requirements for reserves, some lenders now require reserves for buyers with lower credit scores, as well as in certain situations where the overall risk of default may be higher.  A good example is buyers that are keeping their current residence, as described above.  In general, buyers who have little or no reserves will find it harder to obtain a mortgage. 


The debt-to-income ratio is defined as the ratio of total monthly obligations compared to total gross monthly income.  So a homebuyer who makes $5000 per month but has $2500 per month in debts, including the proposed new house payment, would have a debt ratio of 50%.  Debt ratio requirements during the subprime boom were often allowed to exceed 60 or 70% and were completely ignored in many cases. 


Fannie Mae recently changed their maximum debt-to-income ratio to 45% from 50%.  Many lenders may also have an arbitrary requirement regardless of whether or not the loan program guidelines do or not.  The automated underwriting systems have tightened the maximum debt-to-income requirements in many situations.  While credit score may help to increase a buyer's allowable debt ratios, having a high credit score alone does not guarantee an approval. 


This is perhaps becoming the most significant change that is affecting many loan applicants.  An overlay guideline is essentially a guideline imposed by a lender that is over and above the loan guidelines themselves.  For example, FHA does not have a minimum credit score requirement per se.  However, I'm not aware of any lenders that do not have some kind of minimum credit score for FHA buyers.  Why do lenders do this?  Because even though an agency such as FHA or Fannie Mae may guarantee a loan, that doesn't mean the lender will not incur a loss if the buyer fails to make their payments.  Therefore, lenders will often analyze the loans they've originated in the past and impose certain requirements that may be over and above the requirements set by the federal agency that insures or guarantees the loans. 


Most lenders have a minimum credit score requirement of 600-620 for FHA loans.  Also, some lenders may either require a second-level signature from upper management on loans that are deemed to carry a higher risk of default, such as for buyers with high debt ratios, low reserves, a spotty employment or income history or buyers that are purchasing a home that's in an area where real estate values have declined significantly.   



Fannie Mae began this trend a couple of years ago by instituting "loan level price adjustments" for buyers with less than 740 credit scores and who were putting down less than 40% down (yes, 40%).  Although the adjustments to the rate are very minor at this level, buyers with less than a 680 credit score and less than 20% down may see a significant adjustment to either their rate or to their closing costs.  And since many buyers assume the rate they see advertised is the rate everyone gets, they may budget the cost for their new home based on a rate that is not obtainable based on their situation.  Furthermore, many companies are now imposing rate adjustments to buyers seeking government loans (FHA, VA and USDA). 

MORTGAGE COMPANIES THAT ADVERTISE RATES ON THE INTERNET, TV AND RADIO DO NOT TAKE THESE PRICING ADJUSTMENTS INTO ACCOUNT.  Most advertisements disclose somewhere in their fine print that the rates they advertise assume a credit score of 740 and a 20% down payment.  So don't assume the rate you see is the rate you're going to get until a loan officer has a chance to fully qualify you by obtaining a full credit report and also an analysis of your current situation and income. 


Lenders require an appraisal to be conducted on virtually all home purchase transactions to ensure that the price a homebuyer is paying for a home can be justified with recent sales data.  This protects lenders collateral position in case of foreclosure.  In past years, loan officers would simply call their favorite appraiser and request an appraisal. 

Because of perceived conflicts of interest with this process, a new process was created called the Home Valuation Code of Contact, which restricts loan officers and production staff from communicating directly with an appraiser.  The result has led to longer waiting periods to obtain appraisals and sometimes inaccurate appraisals since the management companies often select appraisers that are unfamiliar with an area.  Since the appraisals are now ordered through appraisal management companies, this extra step means extra time (and money in many cases) for home buyers. 


The Federal Reserve recently amended the Truth In Lending laws.  Buyers now must wait at least seven days to close after the full terms of their proposed loan have been delivered and disclosed to them.  Furthermore, if the terms of the loan change (which is sometimes not the fault of the lender and may be the result of a change outside of everyone's control), the buyer must wait another three days to close. 

While this may seem like nothing to worry about, keep in mind that the sales contract in Texas calls for a certain specific closing date.  If the buyer fails to close by this date, even as the result of a federally mandated waiting period, the seller has the option of terminating the contract at their sole discretion in the State of Texas.  These waiting periods can often become an issue and put buyers at risk of potentially losing the contract on their home if they wait too long to select a lender.  The days of five day closings are a thing of the past, and the process of the new appraisal requirements can also cause additional delays as well.   The bottom line is that homebuyers need to shop for their loan well in advance of shopping for a home to avoid any potential delays. 

So in conclusion, the changes that have taken place in mortgage guidelines over the last few years have been a lot more than just higher credit score requirements.  In fact, the minimum credit score of 620 that most lenders require to obtain an FHA loan is not much higher than it was a few years ago.  The most significant changes have occured in the more detailed guidelines that most buyers may not even realize exist.  And while it's certainly safe to say that many changes have taken place, it's certainly not impossible to obtain a loan if these situations can be overcome.

But waiting until the last minute to consult with a lender is a mistake that will cost many homebuyers the opportunity to qualify for a home loan.  If you are considering purchasing a home, please contact me today so I can evaluate your situation and put you in touch with a lender that can consult with you at no charge to evaluate your options. 



Posted by

John Jones, Realtor

Dallas City Center, Realtors

3100 Monticello Ave., Suite 200

Dallas, TX 75205

Dallas, TX Real Estate and surrounding areas of Richardson, Plano, Addison, Frisco, Carrollton, Farmers Branch, Garland, Allen, Irving, Rowlett, and Rockwall.

Dallas, TX neighborhoods and subdivisions of Lake Highlands, White Rock Lake, Lochwood, Eastwood, L Streets, M Streets, Hollywood Heights, Lakewood, Coronado and Gastonwood, Forest Hills, Lochwood, Eastwood, and Preston Hollow.

Copyright 2008-2013 by John Jones, All Rights Reserved.  You may reblog or republish with links back to this post. 





Re-Blogged 17 times:

Re-Blogged By Re-Blogged At
  1. Lew Corcoran, ASP® 12/10/2009 10:11 AM
  2. Mark A. Crain 12/10/2009 10:28 AM
  3. Trisha P Realty Group 12/10/2009 11:12 AM
  4. Michael Eisenberg 12/10/2009 12:10 PM
  5. Svetlana Stolyarova 12/10/2009 01:20 PM
  6. Blatt + Cutino 12/10/2009 01:47 PM
  7. Andrea Merriott 12/11/2009 12:32 AM
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  9. Jason Kardos 12/11/2009 03:35 AM
  10. Lyn Sims 12/11/2009 05:58 AM
  11. Seymoine Schmidt 12/11/2009 06:14 AM
  12. Martin Kalisker 12/11/2009 07:17 AM
  13. Christine Donovan 12/12/2009 11:07 AM
  14. Linda Christopher 12/12/2009 03:33 PM
  15. Jayne Williamson, REALTOR, Broker, GRI 12/18/2009 07:08 AM
  16. Diane Dames 12/28/2009 02:07 PM
  17. Stephanie Reynolds 12/30/2009 01:57 AM
  18. Charles Stallions 01/26/2010 11:13 AM
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Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

Thanks for all of this information. You laid it out so consistenty.

I hope it gets a lot of readers. Unfortunately good hard core real estate talk like this sometimes gets over looked for shorter posts. But, the informaiton is fabulous.


Dec 10, 2009 11:18 PM #26
Dana Scanlon
Keller Williams Capital Properties - Bethesda, MD
Bethesda MD- Award-Winning Bethesda Realtor

Awesome post and detailed knowledge -- kudos to you and thanks for putting this out where we can all read it.

Dec 11, 2009 12:46 AM #27
Jennifer Hamilton
Keller Williams Seattle Metro West - Seattle, WA
Jennifer Hamilton

This just illustrates the point beautifully--If you don't know what's happening out there in Lending, you are doing a HUGE disservice to your clients.

For the past year, it's felt like Lending guidelines are changing by the minute. I currently have a client who's wife is looking at myself and my Lender like we're idiots..."We've never had to do this before. Our friends didn't have to do that." I feel like a counselor to my Lender "Hang in there, this too shall pass."

We had to write letters to the Lender AFTER closing to allow for the Lender to sell our loan to BOA--this is on my own personal loan!

We're still in it to win it--the strong AND educated shall survive.

Great post!

Dec 11, 2009 01:43 AM #28
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

I am glad I am not a lender now.  Of course the tougher guidelines mean lower prices which means tougher guidelines  . . . . .

Dec 11, 2009 04:40 AM #29
Wendy Rich-Soto, Realtor/Broker Associate
Keller Williams Realty, LA Harbor - San Pedro, CA
Getting you to your next with a zero failure rate!

Wow! Is it any wonder that the foreclosure crisis happened?  The lending guidelines were so easy it was almost like filling out a form to get a FREE library card!  Thank you for the post!  The education can benefit ANYONE who is thinking of about purchasing!



Dec 11, 2009 04:42 AM #30
Chuck Ward Local Video Marketing
Florida Mobile Fusion Mobile, Marketing, Local SEO - Tampa, FL
SMS Marketing, Google Plus Local Pages

Wow, I cannot believe what I am hearing,

Maybe I am just having a stream of good luck

I want to address the broker from AZ who said that he is turning down more than what he is approving

You need to contact me so that I can help you get those people approved so you can write and fund that loan

Second, to address the post in general

Good Information -- however, some of us still have stated loans and NIVA -- Of course, stronger credit scores are required along with more down payment (or LTV if refinancing)

FIF Corp is a 21 year old lender underwriting its own business (NO OPTION CONTRACTS) within 24 hours, closing within 14 - 21 days

203k loans, Homepath, Conventional and USDA under 580 FICO (yes under 580 FICO)

Sorry there is my three cents worth (two cents, plus a raise!)

Read my blog about "why I cannot ............ "

Dec 11, 2009 04:46 AM #31
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg Real Estate

Wonderful post that is thorough and easy to understand. Great for consumers questions.

Dec 11, 2009 05:54 AM #32
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg Real Estate

Wonderful post that is thorough and easy to understand. Great for consumers questions.

Dec 11, 2009 05:54 AM #33
Jason Potrzeba
Webster Bank - Providence, RI
Mortgage Banking Officer

Wow, this is very thorough, there were a few things I assumed may have been missing but as I read the entire post; it appears you've nailed every topic. Looks like a well deserved feature post.


Dec 11, 2009 06:48 AM #34
Martin Kalisker
Greater Boston Association of REALTORS - Boston, MA
Professional Standards & Legal Assistant

This is a very good summary, but there really is little difference in financing 100% of the equity and 97%.  Until the cost of home ownership becomes noticable and is a barrier to entry to those who should be renting and not owning, we will continue to notice foreclosures and short sales.  Unfortunately, it is the federal government that is perpetuating the notion that everyone should be a homeowner.  No, home ownership is a privilege, one that needs to be "earned" and people need to "save" to make a down payment.

Dec 11, 2009 07:15 AM #35
Bill Gillhespy
16 Sunview Blvd - Fort Myers Beach, FL
Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos

Hi John,  You obviously did a lot of work with this post !  The stated income loan seems like an invitation to a disaster - good riddance !

Dec 11, 2009 08:12 AM #36
Kelly Dixon
RE/MAX - Clearwater, FL

GREAT post!   I have spent the last 20 years in the mortgage industry, mostly as a mortgage broker and while I'm still actively licensed as a mortgage broker, earlier this year I activated my RE license and am transitioning over.   There is such downward pressure on the industry to put mortgage brokers either out completely or at such a competitive disadvantage that it is really causing me to question if I want to stay in that part of the industry right now.   I do NOT want to go back to work for a bank so I feel right now my best option is to focus on the RE and find a great banker to send my loans to...

Actually what I'd really like to do is go to sleep for 12-18 months and wake up when all the changes are done and just relearn the biz then rather than having to continually relearn every week since so much changes. I said, very well written post!

Dec 11, 2009 01:24 PM #37
Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents

That's ALOT of great information. I have slowly put on my rough pad to acknowledge just the same things..... What a change.

Dec 11, 2009 09:37 PM #38
John Jones
Briggs Freeman Sotheby's International Realty - Dallas, TX

thanks for the comments everyone.  i appreciate you stopping by and checking out the info. 

Dec 15, 2009 03:13 AM #39
Jayne Williamson, REALTOR, Broker, GRI
Keller Williams Realty Mountain Partners, Hendersonville, NC - Hendersonville, NC

AWESOME LAYOUTof information for the average person to understand.  I am re-blogging this as I keep hearing from Buyers when I suggest that they get preapproved BEFORE looking, they have never had a problem getting a loan.  I tell them, "THE WORLD HAS CHANGED FOREVER LAST FALL!"  Congratulations on the featured post!

Dec 18, 2009 07:06 AM #40
Dana Devine
Charles Rutenberg Realty - Apollo Beach, FL

that is a lot of information and thanks for a Realtor and ex-loan officer and still married to a loan officer, the biggest thing i find wrong wit h borrowers and RE agents ....they do not listen OR, OR they listen to the OTHER agent/loan office that tells them what they want to hear

Dec 24, 2009 12:32 AM #41
Diane Dames
Broker Associate & Leasing Consultant@ Lions Share Realty - Victorville, CA
The Real Estate Chick

This was outstanding information and well written. You should've been given a platinum star for this post! Kudos and definitley worth re-blogging!

Dec 28, 2009 02:02 PM #42
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

I want to join in and say that this is a very informative post and I have bookmarked it.  I think it is something I will come back to many times to stay on top of all these changes... and there are more coming the first of the year.

Dec 28, 2009 02:17 PM #43
Charles Stallions
Charles Stallions Real Estate Services - Pensacola, FL
800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl.

Realtors should be aware of all aspects of the process in order to help get their clients to the right lender. We try to have a lender in every month in order to stay on top of things and it certainly helps.

Jan 27, 2010 11:59 PM #44
John Jones
Briggs Freeman Sotheby's International Realty - Dallas, TX

thanks for all the great comments everyone.  Knowing the mortgage guideline changes is very important for both buyers and sellers. 

Jan 28, 2010 07:55 AM #45
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