Mortgages Today: What You Need To Know

It's pretty well known that mortgage applicants are liable to undergo scrutiny more thoroughly than ever before. However, today we are also seeing the emergence of a parallel trend. Not only are borrowers getting a more comprehensive examination, but the properties themselves are being scrutinized as never before.

Every seller who has a buyer who applies for a mortgage must undergo an appraisal. This occurrence will assess the value of the property by comparing it to other homes which have sold in the immediate area. Today, banks are not only paying attention to the monetary value of a property, but also its physical condition.

The Federal Housing Administration has become more stringent with respect to issues such as peeling paint, unpermitted additions and non-fully functioning appliances — and now conventional lenders are following along. Nowadays, it seems just as likely that a real or perceived deficiency in the property’s physical condition may cause a problem for a conventional loan.

Critical consideration of property conditions may occur at any stage in the loan process. For instance, at the appraisal stage, agents no longer rely on appraisers just to measure the property, draw a floor plan and leave. Sometimes they are liable to conduct their own mini-inspection – checking out the roof, looking in the attic, flushing toilets, randomly checking appliances, etc. Malfunctions or deficiencies may not affect evaluation, but if flagged, correction may become a condition of loan approval.

At the underwriting stage: it is becoming more common for underwriters to probe into the property condition, as well as the buyer’s finances. Here, it is not just the appraiser’s observations that receive attention. An underwriter may, for example, ask to see a copy of the home inspection. An underwriter may also want to see what the seller has disclosed to the buyer about the property’s condition and history.

Why might this be a problem? Suppose the disclosure revealed a roof leak in one corner of the three-car garage. It would cost $1,500 to fix. The buyer appreciates the disclosure, but he doesn’t care because he is going to remodel the garage and put a loft room — with a new roof — over that corner. The underwriter says, “No, it must be fixed before we will approve the loan.”

There are other important changes happening in the mortgage world. Effective Oct. 1, 2011, the FHA has announced changes to the FHA loan limits for the remainder of 2011. The new limits mostly affect the most expensive housing markets in the United States, with lower FHA loan limits applied in these high-cost counties unless Congress introduces legislation to change the loan limits.

In an Aug. 19, 2011 press release, the FHA announced, “On Oct. 1, 2011, the FHA will implement new single-family loan limits as specified by the Housing and Economic Recovery Act of 2008 (HERA). As a result, FHA will reduce loan limits in the highest cost metropolitan areas of the country.

The new, lower limits for high-cost counties that take effect Oct. 1, 2011 were originally scheduled to become effective back in 2009, but as the FHA press release states, “continuing strains in credit markets led the Congress to delay implementation. The result has been nearly three years of higher loan limits for some areas based on the Economic Stimulus Act of 2008.”

The new “ceiling” loan limit for higher cost areas will be reduced from $729,750 to $625,500 for one-unit properties. FHA loan limits vary based on area median home price, but all will fall within the range of $271,050 and $625,500 for one unit properties.

At the end of the year, loan limits for 2011 will be reviewed as usual for 2012.

Just recently, the federal government announced that it and five major lenders, including Citigroup, JPMorgan Chase, and Bank of America should be reaching a settlement soon on new regulations and practices in light of the notorious robo-signing foreclosure scandal that rocked the industry last year. The banks could be on the hook for around $20-30 billion, plus the possibility of additional fees in the future. In return, though, banks will likely feel free to increase foreclosure processing, which has been on ice due to uncertainty over the past six months.

The main impact on this settlement for the market will be greater access to financing. This is good news for both buyers and sellers. Homebuyer confidence is bouncing back, and multiple bids have become common in our area once again. July and August experienced the closing of 61 single-family homes in Scarsdale. Meanwhile, mortgage rates are still low, remaining just above their lowest levels of 2011 and at a general all-time low — an additional piece of good news in a beleagured economy.