The thought of shopping for a home loan can be daunting, especially when news stories talk about how tight credit is and how perfect your FICO score must be for lenders to even consider you.
In this month's Buying Advice, we'll look at how and when you should seek approval for a loan — and what documents the banks likely need to give your funding the green light.
We'll also check in with the latest market information; look at what's happening with the spooky, so-called "shadow inventory"; and consider what you should do when that property you've made an offer on hits appraisal problems.
Finding a home loan
Before you start looking at houses, it's a good idea to know how much you can afford. To get a rough idea, you can get a lender prequalification, a quick process that can tell you roughly how much home you can afford. This does not, however, mean you have secured financing, and it in no way obligates you to use that lender.
Preapproval is the next step and is generally more involved, requiring documentation of your income and assets. This tells you how much a lender is willing to lend you and at what rate, which you must know when you're ready to make offers.
Here's what you should count on getting together for this process, according to Erin Lantz, director of Zillow's Mortgage Marketplace:
- Two months of pay stubs.
- Two months of bank statements: That means checking, savings, brokerage and retirement accounts. Be sure to include all pages, not just the summary page.
- Two years of W-2s if you are a salaried employee.
- Two years of tax returns if you are self-employed.
- Rental history for the last two years if applicable.
Be prepared to show any other sources of income, such as child support, rental income, retirement income or commission, and bonuses for a period of two years, Lantz says. You might even bring along a copy of your divorce decree if it helps show when you and your ex's money or expenses parted ways.
'The lender wants to get a sense of your full financial picture," Lantz says.
That also means pulling a copy of your credit report. People with the best scores will have access to the best rates. But, even these days, you don't need a credit score of 700 to get a loan, says Keith Gumbinger, vice president of mortgage research firm HSH.
"There is an erroneous belief that you cannot get a loan if you are not perfect," Gumbinger says. In reality, he says, those with scores above 580 still have access to credit.
And qualified borrowers without much of a down payment can still get a Federal Housing Administration loan that requires just 3.5% down. They will have to pay additional fees, as well as annual mortgage insurance, something folks with a traditional loan can cancel in as little as two years. Buyers with less than a 20% down payment are generally required to pay mortgage insurance.
Yes, it is more restrictive than it was a few years ago, when anyone who breathed could get a home loan. But it's not impossible.
And these days, Gumbinger says, it really pays to shop around.
"The availability of credit and the price of that credit is highly variable from one side of town to the other," he says. "You'll have lenders who are actively interested in getting your business and those that price themselves defensively" to avoid it.
Gumbinger says he recommends starting the preapproval process early and including some small to midsize lenders that do business in your area.
"They probably have more intimate knowledge of what's going on in your market," he says.
Before you start shopping, it's also a good idea to bone up on your mortgage knowledge. A survey released last month by Zillow showed that homebuyers answered basic questions about mortgages wrong about half (46%) of the time on Zillow's Mortgage IQ Quiz.
Find out everything you need to know about points, fees and ARMs before you commit to a loan. It's a sad fact, Lantz says, that most buyers spend just five hours researching their huge mortgage decision but spend 10 hours researching a car purchase.
Home-sales snapshot: Bumping along the bottom
Fewer sales: Existing-home sales fell 3.8% to 4.81 million in May from 5 million in April, a 15.3% drop from May 2010 when sales were surging before the deadline for the homebuyer tax credit, according to the National Association of Realtors.
It's yet another stumble in the housing market's excruciatingly slow recovery, but one that NAR's chief economist Lawrence Yun characterizes as a temporary setback.
"Current housing-market activity indicates a very slow pace of broader economic activity, but recent reversals in oil prices are going to mitigate the impact going forward," Yun says. He says he expects the pace of sales activity to be stronger in the second half of this year, especially in the Midwest, where flooding was a big factor.
Prices down: The national median existing-home price fell 4.6% in May from May 2010. Distressed homes accounted for 31% of all sales in May, down from 37% in April.
To be sure, home-price performance varied greatly depending on location. Home prices are rising or stable in markets with good employment pictures, such as North Dakota; Alaska; Washington, D.C.; and many parts of Texas.
Regionally, the median price in the Northeast increased 6.1% to $241,500 from a year ago, and prices fell 12.6% in the West.
Sales fall: New-home sales fell 2.1% in May to 319,000 from 326,000 in April, after two straight months of increases, according to the Census Bureau and the Department of Housing and Urban Development. Sales were up 13.5% from May 2010.
Analysts at Econoday characterized this dip as a market still "bumping along the bottom" but said the results were still better than expected. The supply of new homes on the market reached a 50-year low of 166,600 — about a six-month supply at the current sales rate. That low supply is starting to push prices up.
Prices slightly up: The median price in May edged up 2.6% to $222,600 from April, while the average bumped up 0.5% to $266,400.
The Federal Housing Finance Agency's April House Price Index, which tracks homes with loans backed by Fannie Mae or Freddie Mac, says U.S. house prices rose 0.8% between March and April, supporting the idea of bumpy and somewhat confusing recovery.
Shrinking shadow inventory
One spot of good news for buyers and sellers: The current residential shadow inventory — properties that are seriously delinquent, in foreclosure or bank-owned and not on a multiple-listing service — declined from 1.9 million units in April 2010 to 1.7 million units this April, a five-month supply.
That overhang of distressed but not-yet-available properties is down 18% from its peak in January of last year, a glimmer of hope for values in the year ahead.
What can you do if the home you want doesn't appraise?
You've picked out a house, made the offer and then your lender's appraiser comes back with a value that's lower than your offer, deep-sixing your loan. This can happen if there are a lot of distressed properties in your area, if the house has unique features, if there's a dearth of recent comparable sales or if the appraiser hired by the bank doesn't work in your area that much.
What can you do about it? Not a lot, as it turns out. The law says that you can't pick your appraisers, even if you are paying for them. But you can appeal the appraisal and ask the lender to review the report. You can also ask and pay for another appraisal, says Joseph C. Magdziarz, president of the Appraisal Institute.
Or, you could ask the seller to split the price of another appraisal with you. If it comes back low again, it should encourage the seller to lower the price, says Gumbinger of HSH.
The seller should also make the appraiser aware that there are multiple offers on a property, Magdziarz says, and point out any recent sales that the appraiser might have missed.
Many people don't realize that you can even accompany the appraiser during the inspection to make sure the appraiser carefully evaluates the property and to provide any information you think is relevant. Call your bank to set that up.
Of course, it's always a good idea to tell your lender beforehand that you'd like an appraiser who is local and well-qualified, with five to 10 years of experience, mostly in homes within your price range. These days, however, that plea works better at small and midsized banks, Magdziarz says, especially those that don't own appraisal-management firms.