Potential homebuyers indeed have a lot to contend with in today’s tight lending environment. But Freddie Mac wants homebuyers to take a deep breath ‒‒ you may be in better shape than you think.
Christina Boyle, SVP and head of single-family sales & relationship management at Freddie Mac, reminds that while credit standards today are far stricter than they were in the salad days leading up to the recession, they are actually about the same as they were in the mid-1990s. On top of that, still-low interest rates actually put low-cost mortgages within the reach of many homebuyers.
In a recent posting on Freddie’s blog, Boyle encourages mortgage seekers to keep in mind the “four Cs” ‒‒ the main four things lenders look at when deciding whether to write a loan. First there is the borrower’s capacity to repay the loan. Lenders, Boyle writes, look at income, employment history, savings, and monthly debt payments ‒‒ credit card charges, monthly insurance payments, and other continuing obligations ‒‒ to make sure borrowers can comfortably fit a mortgage payment into their monthly bills.
Next there is capital, the borrower’s financial reserves. This includes cash on-hand, plus the amount borrowers have in investments, properties, and assets that could be sold for cash quickly, if needed. Then, of course, there is collateral, or the value of the property you would like to buy. In the event of a default, lenders want to know they have a valuable asset on which to collect.
Lastly, and probably the aspect mortgage seekers are most aware of, is credit rating, or the borrower’s track record of being able to pay bills on time. This may also be the toughest part of the mortgage picture these days. Lenders in the post-recession regulatory environment are skittish about who they write loans to, and those with less-than-perfect credit have been more frequently denied mortgages in recent years. Still, excellent credit goes a long way toward landing a good mortgage.
If there is a fifth C, it would be cash down, though Boyle says that the old maxim of 20 percent down is not as important as it used to be. While interest rates and monthly payments will almost certainly be higher with less down, it is more common for lenders to accept less than 20 percent as a down payment.
A report released last month by RealtyTrac bears her out. According to RealtyTrac, buyers put down an average of 14 percent ‒‒ about $32,000 ‒‒ on home purchases last year. Freddie, of course, accepts as little as 5 percent down. “And our new Home Possible Advantage mortgage accepts as little as 3 percent,” Boyle says.
The main thing Freddie wants buyers to know is that lenders do not want to put anyone into a situation they can’t get out from under. “If you're thinking about buying, explore the possibility,” Boyle says. “Don't assume that you won't meet the requirements.”