by Laurel Michaels

Created on: June 04, 2009

If there were a prize for the industry deemed "most changed" it would have to be awarded to the mortgage industry. Guidelines for mortgage qualifying have changed frequently for the last few years. If you are in the market to buy a home now, you should be aware of the underwriting guideline changes that will affect your ability to qualify for a home loan.

FICO Score - FHA underwriters used to be able to approve borrowers despite low FICO scores, especially when the low score was caused by a life changing event such as a death in the family or divorce. Now, however, most FHA lenders will not loan money to a borrower whose score is below 620, period.

Conventional underwriting has had FICO changes as well, mostly due to mortgage insurance guideline changes. Mortgage insurance protects the lender in case a borrower defaults on their loan. It is required on all conventional loans with a loan to value of over 80%. Because the default rate is so high, mortgage insurance companies are trying to mitigate further losses by setting minimum FICO requirements of 680 to 720. They reason that the higher the credit score, the more conscientious the borrower, therefore the less risky the loan.

Debt Ratios - A very important part of the underwriting process is determining the applicant's debt ratios. It used to be that if an automated underwriting system approved the loan, then no matter what the debt ratios were, the underwriter would approve the loan. Now many lenders have set debt ratio restrictions of 41% or 45%.

Automated Approvals - As mentioned previously, automated underwriting systems are used to help determine an applicant's eligibility for a loan. In the past, as long as a human underwriter verified the income, assets, and employment, the automated approval would stand. These days, however, a computer approval doesn't hold as much weight. Underwriters are told to scrutinize loans very closely in order to minimize the risk of the loan defaulting.

Buying Up - There are amazing deals in the housing market right now. Homeowners can afford to buy their dream home because finally prices are affordable. However, a trend developed that lenders call "buy and bail." Borrowers would buy a larger, nicer home, then stop paying on their current one, reasoning that they have nothing to lose since they are upside down in value anyway.

New underwriting guidelines came out last year to help prevent this trend. If an applicant owns a primary residence and is purchasing a new one, he must qualify for both house payments. If he needs to claim rental income on the old home to qualify then he must prove that he has 25% to 30% equity in the old property. If he has equity, he is less likely to "bail."

Today's housing market is exciting, but undeniably challenging for homebuyers. The key to a successful loan closing is to use a mortgage loan professional that is up to date on guideline changes, is able to work with more then one lender, and that acts quickly to move the applicant through the loan process and get the loan closed before any underwriting guideline changes take effect. "The only constant is change" was never so true as today, in the mortgage business. If you are planning on buying a home now, educate yourself about underwriting guidelines so that you will be a prepared and savvy loan shopper.

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