The Credit Stimulus might actually be working. Rates are now at their second lowest point ever at 4.96% for the week ending the 13th, and applications are rising. This is not the perfect market for everyone, but first-time buyers are truly beginning to see the value of buying into this market and the credit seems to be loosening... a little.
While it is loosening, the underwriting is getting more and more unpredictable. Even though it is loosening, more deals are falling due to loan problems than before. This property bounced back onto market today and reduced from $370,000 to $360,000. Normally a property under contract for close to a month is well past inspection issues. Normally a property that does not appraise does not rebound onto market only to have the sellers dump $10,000 in price. (appraisals may come in low, but a seller might get entrenched and fight for their price... odd that this one chose to return to market at a 2.5% lower price)
Whether you're buying or selling, it matters who the lenders are. If you think it's a great time to buy, you better make sure what you're buying: closes.
As a buyer it matters that your lender doesn’t just offer you
good terms and good prices; it matters that they can close on time, won’t
change terms on you halfway (or the day before) closing and that their present
portfolio of loans is not compromised by existing toxic debts that prejudice
their underwriting standards. Just as your agent should put you in the best negotiating position possible, so should your lender. If the lender compromises your ability to get that great house or great deal... it doesn't matter how low their rate or costs are.
As a seller, the buyer's lender is equally important. Most sellers
do not care if the buyer is getting raked over the coals, but they might want to start. Ask yourself, would you care if your loan suddenly changed on you, and correspondingly, little things like, the rate; your downpayment requirements; your proof of income; documentation on that deposit in December; stuff that should have been presented at application that may be different or hard to get today, all started to move around on you? As a seller, can 
you see how a buyer might get, well, squirrelly? Squirrelly buyes usually don't close. Is it a problem if they don't close? Nod your head, yes. It also matters that the buyers lender can
close on time because, hey, you would probably like to close on time. Finally,
you’d like to know the quality of that piece of paper that says the buyer is
“pre-qualified” or “pre-approved.” Sarbannes-Oxley actually can prohibit the
lender from speaking with the buyer’s own agent, let alone a selling agent. This effects sellers because the pre-approval letter could be the only piece of information they receive on the loan until closing. Would you like to spend 30 to 45 days in the dark on whether or not your home is going to close?
Then there is this threshold called an appraisal...Appraisers are all over the place and I predict more deals will fall due to low or peculiar
appraisals come May when the Fannie and Freddie loan systems go to a
blind-rotation, and lenders can no longer determine who their appraiser is. How this can effect a transaction: if a buyer sends their loan to a lender with heavy foreclosure
exposure (think most-famously Countrywide) that appraiser might not appraise the property the same as say, a lender from Wells Fargo or PHH who had
far less exposure. Because some lenders have such a glut of “toxic”
assets presently rotting in their portfolio, they are self-regulating with more extreme standards. If they ever want bailout money, they have to move forward with a cleaner portfolio. Correspondingly, their underwriting is more risk averse. Values are more conservative. "Defects" like drainage and roof may become required repairs. Almost certainly there is a requirement for habitability: that bank-owned home without a stove and the winterized water heater? The appraiser might come in fine on value, but you can count on him adding a return trip fee to make sure the appliances are in, the property has running water and flushing toilets and the furnace is keeping the place toasty.
This time
last year we were dealing with the first wave of declining market indicators. Until
late January last year, 3% got a buyer in conventionally. That went to 5% for
everyone in February. But for almost everyone it was a 10% minimum downpayment.
For a couple lenders, Private Mortgage Insurance didn't want any further exposure to their crumbling portfolio, and at least for a little while, wouldn't touch some lenders, so they had to go to 20% down. One would naturally assume that this would
be uniform, something as simple as a minimum downpayment for a conventional
loan, but it wasn’t (and still isn’t). Far from it. I had a buyer
doing a loan with First Bank (almost zero toxicity in their loan portfolio) buy
on Prairie Wind in Wagon Trails with 5% down at $350,000. My colleague had a
buyer with ENT on the same street two blocks away the same month who had to bag
their deal due to ENT requiring 10% down. That was at $275,000. Both buyers had credit in excess of 720 and high-paying jobs with assets. Lender A: 5%. Lender B: 10%.
Some Rules of the Game:
1.) Get a Good Faith Estimate from all the lenders you are speaking to. Get it for the same program, same rate, same day, preferably within 3 hours of one another. If a lender cannot email you a good faith estimate the same day, move on.
2.) Get a loan pre-approval letter indicating all necessary requirements for fulfillment of the loan.
3.) Get an answer to how many days before closing the lender typically has figures to the title company, how many days it takes them to close an "average" loan, and, if this loan is in fact "average." If you have a desperate seller a 15 day close is a huge advantage over a 45 day close. You don't want to get a great rate but pay a higher price because your lender is pokey. Find out BEFORE you write.
4.) Find out how they perform their appraisal system, when it must be ordered by, is a third-party involved, etc. Ask them to elaborate. You might not have any clue what you're looking for here. But boy, the lender better have a lot to talk about! If they don't, and call your bluff, ask why they're not elaborating. Let them educate you: it's your money.
5.) Ask about their previous exposure to sub-prime loans and their present portfolio of loans. Do they service them? How long have they serviced them? It's one thing if all they do is originate. It does say something in this day and age if they service them personally (ERA/PHH and Wells Fargo service almost everything and have for several years). If they're willing to live with their own product, it probably is not garbage.
6.) Get multiple opinions if you're a buyer. It won't impact your credit rating to seek advice from multiple lenders for the same intention: residential home financing. Now don't go and apply for a VISA or buy a car while you're doing this. But talk to two to four, pick the one you prefer to work with, and send them a competing Good Faith Estimate if you would like them at a lower price.
7.) If you're a seller, make sure your agent has a chance to at least speak to the buyer's lender, not just email, but a live conversation. This can usually be done by a tactful initial conversation between the agents while the deal is first consummating. It isn't perfect, but two parties are about to be financially wed for the next month or two. It's much better to know what you're in for.
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