If you've been in the market for a mortgage recently, you've no doubt noticed how difficult it can be to get approved. You're not imagining it, and it's not just you. Paul McFadden, a loan officer with The Legacy Group in Bellevue, Washington, says, "These days, the number of mortgage applications that get approved is probably three out of 10. In the heyday, it was nine out of 10. Normally five or six out of 10 would be the ratio."

IN PICTURES: Financing For First-Time Homebuyers

Underwriting standards have tightened, meaning that borrowers need higher credit scores, more income and higher down payments. And that's not all. There are many challenges to financing a home, but the following six are especially problematic in today's market.

  1. Higher Credit Score Requirements
    Want a loan? You'd better have top-notch credit to get the best deal, or in some cases, to get approved at all. McFadden notes that "although loans can be had in most cases for credit scores down to 620, they often come with a higher rate and/or fees."

    Gregory B. Meyer, Community Relations Manager with Meriwest Credit Union, says, "Credit is an issue, as lenders have raised the bar on credit scores. In 2006, a 680 FICO would get you into a house. Now it takes about a 740." (If the recession has wrecked havoc on your FICO score, these tips will help you rebuild your credit. Don't miss Bounce Back From A Credit Score Disaster.)

  2. Greater Scrutiny of Income and Assets

    Meyer also says that "In the past, banks were lax in verifying income and deposits. Now those things have more scrutiny."

    Tom Wissert, who has more than 30 years of experience in real estate, banking and mortgage lending, cautions that "homebuyers better get ready to prove that just about anything that looks 'hinky' on their application is not an issue. Mortgage lenders today have to verify, re-verify and re-verify again. Qualified buyers are now put through the ringer and often turned down because of appraisal issues, property issues or anything that looks strange even if the buyer can prove they can pay cash for the property."

    He says that we are now seeing regulatory overkill "after years of letting the rules be compromised by mortgage lenders who would not follow the traditional rules that are time-proven to work." (We walk through the steps needed to secure the best loan to finance the purchase of your home in Understanding Your Mortgage.)

  3. Ever-Changing Borrower Requirements
    Many borrowers are finding that they can't pin down just what they need to do to get their mortgages approved. Warren Greenlee, a broker with Re/Max at the Lake in Mooresville, North Carolina, says that a couple of years ago, "anybody with decent credit could get a loan for any size home. Now it is critical to have credit scores above 700, total debt ratios below 36%, a minimum of 20% down to avoid PMI and good stable employment. Unfortunately, a buyer can have all of these items fall into the current guidelines, only to have the guidelines change."
    Greg Cook, a licensed California mortgage broker with the First Time Home Buyers Network, says that for the "'middle of the road' consumer, those without a large down payment and average to slightly above average credit scores, home financing has become a moving target."

  4. Home Appraisals are coming in Low

    Mortgage banker Darren Clark of Villa Mortgage, Inc., in Cincinnati, Ohio says, "Because of slow sales, which lead to few comparables, and the large amount of short sales, sheriff's sales, and bank-owned sales, which are priced at a fraction of a dollar, houses are not appraising for the contract price."
    He adds, "Part of this problem can be blamed on the government enacting HVCC [the Home Valuation Code of Conduct], which regulates the appraisal industry, and was an attempt to curtail fraud, but has turned into an unexpected a hindrance on the real estate market recovery."

    The problem with HVCC, according to Clark, is that appraisals are now often completed by appraisers who are inexperienced and often unfamiliar with the markets they are working in, resulting in inaccurate appraisals and unnecessarily rejected loan applications. (With interest rates at all-time lows and major rate hikes around the corner, many experts say the best time to snag a mortgage is right now. Don't miss Why Now Is The Time To Buy A Home.)

  5. Fewer Opportunities for Small Business Owners and Independent Contractors
    "Congress recently introduced legislation that would make 'liar loans' illegal," says Cook. "Liar loans" are another term for low or no-documentation loans. As the name implies, some borrowers have used these loans to deceive their way into a mortgage they didn't really qualify for. However, these loans are also a valuable tool for many honest workers who are non-U.S. citizens or self-employed and therefore don't receive regular paycheck stubs or have a simple, straightforward way to prove their income to lenders.
    "Typically, a business owner pays himself the minimum amount to avoid paying payroll taxes while reinvesting profits into his business. Banks will no longer make exceptions for circumstances like these and turn many loans down that previously would have been granted."

  6. Condo Purchases Face Additional Tests

    Aimee Renkes, a mortgage consultant with Wintrust Mortgage in Chicago, says, "Condo loans are much tougher these days as we have to approve the condo building in addition to the buyer. We are documenting cash reserves, owner occupancy rates, low delinquency rates on monthly assessments and more. In some markets, such as Chicago, this can be tough to overcome. Additionally, the FHA recently changed the condo approval method, which has further inhibited many buyers who only qualify for FHA loans."

The Quest for Homeownership
For worthy borrowers seeking to take advantage of today's low interest rates and relatively low home prices, having to jump through hoops that homebuyers just a few years ago didn't have to can seem mighty unfair. If there's any upside to the tight credit market, it's that we should see fewer foreclosures in the years ahead.

Get a rundown of the latest financial news in this week's Water Cooler Finance: Greece Attacks And Google Hacks.

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