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With banks implementing a freeze on foreclosures and an unemployment rate of over nine percent in Ohio, it is easy to feel as though the chips are stacked against those in the real estate industry. Many are asking the question: How do you get a mortgage loan in today’s market?

On the one hand, the short answer is there is no short answer. On the other hand, REALTORS® are likely to get a number of answers depending on whom they ask the question. Although there are challenges to securing a loan, there remains lending avenues that can successfully result in financing.

The Builder/REALTOR® Alliance Committee (BRAC) brought four lenders and a consultant in on Oct. 13 to discuss these issues. Here’s what they had to offer.

So, what are the challenges?

Regulatory reform means more changes to come

Marianne Collins, senior vice president of mortgage lending at Insight Bank indicated that many of the regulatory laws have been effective as early as 2009. Other laws part of the regulatory reform will not take effect for up to eight years from now.

An important regulatory change garnering significant attention is the Home Valuation Code of Conduct (HVCC). Effective May 2009, HVCC is designed to enhance the accuracy and independence of the appraisal process, or “separate the appraisal process from the production staff,” noted Collins.

This separation of process and production to ensure more accuracy and independence, Collins noted means:
● Mortgage brokers or anyone involved in loan production are not permitted to order appraisals;
● Production staff cannot inform the appraiser of the anticipated loan amount;
● Cost of the appraisal comes directly from the lender;
● Lenders are required to test a randomly selected 10 percent of appraisal reports for quality control.

Collins also discussed the Real Estate Settlement Procedure Act (RESPA). RESPA is intended to provide borrowers with standardized Good Faith Estimates (GFE) which disclose key loan terms and closing costs. Collins indicated the standardized GFE under RESPA “limits the fee to obtain a GFE to the cost of a credit report.”

Although the purpose of RESPA is to provide clarity and an explicit declaration of costs up front for borrowers, Collins noted that the new process “redefines the meaning of a loan application,” and the “GFE no longer tells the borrower how much cash they need or what their mortgage payment will be.” For Collins, these outcomes mean “borrowers leave the loan application totally confused.”

New World Meets Old World Condo Lending

Joseph A. Sauk from Bank of America suggested there is a changing landscape for condominium financing as well. “Old World” lending according to Sauk, included originating loans that focused “more on credit rather than collateral.” At the height of “Old World” lending, notes Sauk, “we saw 95 percent CLTV loans originated with little to no review of the condominium elements.”

The November 2007 release of Announcement 7-18 marked the beginning of major industry changes in condo approval, including:
● Removal of the ability for new condos to use Limited Review;
● 20% commercial space requirement;
● Increased responsibility for lender;

Also, notes Sauk, are established or new condo lending programs like Project Eligibility Review Service (PERS) that should not be overlooked. Important to note,“PERS is a full doc, fee based Fannie Mae process,” with Fannie Mae making the final review and approval.

A viable lending option, suggests Sauk is PERS because it “can be used as an exception process for projects that do not fit traditional condo standards.” PERS also has a 4-6 week turnaround time for submission.” Some non-traditional standards that make PERS an option to consider include:
● Condo with hotel;
● Rent Regulated;
● Leased amenities;
● Incomplete phases.

Expect more scrutiny

Advertising, sales, and marketing consultant for the residential home buying industry, Page M. Vornbrock of Page M. Vornbrock & Associates, LLC, sees how the upcoming changes for securing a home loan in today’s market can be narroed down to three key areas: down payments, credit issues, and interest rates.

Vornbrock suggests that real estate professionals and builders alike can expect lenders to execute greater appraisal scrutiny, as well as require more detailed financial data and increased liquidity requirements.

Also, Vornbrock expects that residential home building industry professionals should not be alarmed to see an increase in “more conservative lending policies, tighter underwriting standards, and more cash required from borrowers.” These requirements all point to an increased emphasis on the credit quality of borrowers.

Although more bank failures and home foreclosures are expected throughout 2011, lenders do not anticipate seeing the market turn around until 2013, says Vornbrock.

With so many changes taking place now and on the horizon, you may be wondering: What are the options to secure a moretgage loan?

FHA Loan Programs Offer Options

Dave Dewey, home loan manager for Bank of America suggested that “one in three borrowers today in our market are FHA borrowers.” Also, notes Dewey, “FHA’s qualifying guidelines and low down payment requirements may provide the opportunity for your clients to go from being home shoppers to home buyers.”

Key features that may make FHA loans the best option for potential homebuyers include:
● Low down payment options -- as little as 3.5 percent;
● Flexible qualifying guidelines -- more flexible credit guidelines than most conventional loans;
● Opportunity to use gift funds toward the down payment;
● Allowable seller contributions of up to 6 percent;
● Fixed and adjustable-rate loans options.

Dewey notes that “FHA is critical to finding potential buyers in this market,” and there are loan programs available to meet buyers’ needs.

For example, the 203(k) Rehabilitation Mortgage features a single loan that allows sellers to sell a property “as is.” This means that the borrower finances the home improvements by combining the cost of buying a home with the cost of making repairs. Additionally, buyers can qualify for a loan amount based on the “as-improved” value, with as little as 3.5 percent down payment.

Dewey says it is important to “get buyers preapproved with a lender to determine they are credit worthy and ready to buy a home.” Also, “prepare your customers to be ready for the documentation necessary to get a quick response,” indicates Dewey. This can expedite taking advantage of the fixed, adjustable, reverse, and renovation loan products available through FHA.

An Option for Unusual Properties

The combination of lenders strict income demands and appraisal regulation changes may actually mean good news for locally owned, Union Savings Bank.

Vice president of lending, Tom Piecenski, suggests recent changes in the banking industry have encouraged many global lenders, Fannie Mae and Freddie Mac to “shy away from purchasing unusual properties or eliminate portfolio lending completely,” leaving these borrowers with very few financing options.

What is an “unusual property?”

“It can be difficult to describe because it can be so unique,” Piecenski notes. “Let’s say a client inherits a working farm with live stock and 50 acres which are leased to a farmer.” Another example of an unusual property suitable for portfolio lending might be a home with nearly impossible to find comps – such as a log cabin. In both cases, “with the right type of client, we would be very interested in working with properties like that,” says Piecenski

Unlike other lenders, “Union Savings Bank is a privately owned bank that has embraced the opportunity to offer portfolio lending for unusual properties in the face of so many others eliminating this product,” notes the vice president of lending.

Furthermore, “Just because a loan is portfolio does not make it a subprime or bad loan, rather it might be a vacation or second home – which can be difficult to finance as well,” says Piecenski.