Obstacles Faced by First Time Home Buyers

Obstacles Faced by First Time Home Buyers

For most people, buying a home means that they must also apply for a mortgage loan and meet certain qualifying requirements in order to be approved for that loan. Folks who had previously bought a home and in many ways know what the process entails can be thought of as being more prepared – based on their knowledge and experience, as well as cash assets from the sale of an existing property – to buy a new home, whereas first time home buyers have neither the experience or cash resources possessed by a repeat home buyer.

So among the first hurdles or obstacles a first time home buyer encounters is having enough cash for down payment and closing costs, as well as having to qualify for mortgage financing to complete the home purchase. In most cases, however, these are obstacles that can be removed with diligent and advanced preparation because they are within a home buyer's control to remove; but those obstacles which home buyers have no control are seen as the most difficult to deal with and in some cases cannot be overcome.

Going back to a time prior to the subprime mortgage meltdown and real estate crises which led to the “great recession”, buying a home was an endeavor which consisted of many steps that at times made the goal of home ownership almost unrealistic; but for first time home buyers this process must have seemed – on occasion – excruciatingly laborious, if not improbable, based on the volume of paperwork, documents and other information that were required to complete a real estate transaction; especially for those buyers who used FHA-insured mortgage loans to finance their purchases.

The FHA has traditionally been more paper and document intensive than conventional and, understanding that human nature suggests we sometimes take the path of least resistance, when subprime mortgages like the NIC-NAC (No Income Check-No Asset Check) were introduced to mortgage and real estate markets, the enthusiasm with which they were embraced was indeed great, but hardly surprising given the manner in which these mortgages transformed home buying for experienced and first time home buyers alike.

But subprime mortgages, while easing the path to home ownership through a simplified and less paper-intensive process, was simultaneously creating an environment which would eventually lead to a number of new obstacles to home ownership, especially for first time home buyers. In an effort to address – in some meaningful way – the negative impact that subprime lending made on the overall economy, Former President George W. Bush signed – on Wednesday, July 30, 2008 – major housing legislation known as the Housing and Economic Recovery Act of 2008 (HERA).

Included in the HERA legislation was the Secure and Fair Enforcement (S.A.F.E.) for Mortgage Licensing Act, the final stage of which became law in January 2010, and introduced an entirely different application process - which featured the New GFE - plus procedures set forth by a nationwide mortgage licensing system and registry for all State-licensed mortgage originators. In addition to the foregoing, new lending guidelines which introduced the QM (Qualified Mortgage) has already taken effect in mid-January 2014 – just prior to the writing of this article – and poses a number of different challenges that home buyers, especially first time home buyers, must overcome in order to acquire their own homes.

A recent article titled, 'Some Home Buyers Face More Hurdles in 2014' and published on the Floor Daily website referenced a “Straight from the Top: Insights from Lending Leaders” session attended by a number of CEOs and senior executives from the biggest names in mortgage lending. At that gathering which took place on November 11, 2013 one of the topics discussed was the new QM regulation and its expected impact on first time home buyers.

In fact, this quote from the article paints a rather pessimistic picture for those buyers who would be attempting to acquire a home for the first time in 2014: “The Qualified Mortgage, or ability-to-repay rule, will become effective in January 2014 and contains a number of underwriting standards that will constrict mortgage availability and deny credit to some first-time home buyers, said Bill Emerson, CEO of Quicken Loans.” The QM is one of those obstacles to home buying that is not within a first time home buyer's ability to control.

This brings us back to the subprime meltdown and financially crippling economic crises that ensued, which was a catalyst for all the new legislation and mortgage regulations that currently exist. Starting with this most recent change, the article states that this “...QM rule requires significant documentation from consumers to justify lenders’ underwriting decisions; lenders face strict penalties if a loan is made outside of the specific criteria...”

In view of QM requirement and the stiff penalties that would result for lenders who do not comply, we have to assume that lenders will tend to “err on the side of caution” whenever questions arise about a borrower's qualifications; but isn't it almost a certainty that there will be questions about the qualifications of a first time home buyer? Kevin Watters, CEO of JPMorgan Chase – during the same November, 2013 gathering – indicated by way of his agreement with another attendee, that “lower- and moderate-income buyers, as well as self-employed buyers who don’t have a consistent flow of income, might have a tougher time in the new lending environment.”

While there can be consensus that home ownership might not be for everyone, there should also be some agreement that those who aspire to it, and can demonstrate an ability to qualify for, and maintain a home in accordance with traditional mortgage qualification standards, ought to be afforded the opportunity to own one, without being subjected to significantly more hurdles than had been considered reasonable by most conventional and FHA underwriting guidelines that existed prior to the subprime era.

Based on everything already mentioned above one can safely conclude that the home buying process can be problematic even for those buyers who can comfortably afford to buy a home and qualify for mortgage financing necessary to complete the transaction, based on their actual income, assets and credit; but if they are unable to document income – due to a shorter than required self-employment period – or provide proof of assets (bank statements, stocks, etc.), there will exist an obstacle to buying that home.

Many real estate and mortgage lending professionals might be willing to share stories and/or examples of obstacles that are inherent in the home buying process; and they will probably also opine that there is no need to create new and seemingly superficial obstacles to home buying, but that's a conversation for another time. For today though, if you are a first time home buyer who is not familiar with the process of buying a home, the gleaning of knowledge and information about home buying is now infinitely more important in view of all the recently established regulations. The more you learn, the more you will benefit from your knowledge, because learning is within your control and must be considered a huge asset. Don't allow the lack of knowledge to be yet another obstacle to owning your own home.