Changing expectations to reflect stricter mortgage processes.

Tighter underwriting standards are forcing lenders to once again rely on borrowers' credit scores, and credit reporting agencies are revising scoring models to better predict the likelihood of defaults. Credit scores will continue to be based on borrowers' debt levels, payment histories, length of credit histories, recent openings and inquiries, and credit types. However, you can expect reporting agencies to place more emphasis on identifying one-time, extenuating circumstances versus habitual patterns of late payments to predict overall risk levels.

The recent credit crisis has forced lenders to view loans with weak or little documentation as risky. Therefore, borrowers with lower credit scores and higher overall risk can now expect increased documentation requirements. A loan that did not require documentation a few years ago may now necessitate verification of income, assets, and other details on the application.

In recent years, subprime mortgages – defined as loans that do not meet Fannie Mae or Freddie Mac guidelines – have provided increased loan opportunities for borrowers with weak credit histories or severe credit problems including bankruptcies and judgments. Unfortunately, high default rates on these risky loans coupled with adjustable rate mortgages (ARMs) triggered many of the problems facing the mortgage industry today.

With the rise of stricter guidelines and risk managements, the market for subprime loans is vanishing. Credit-challenged borrowers are now limited to "Expanded Approval" products offered through Fannie Mae and Freddie Mac.

Additionally, borrowers may turn to federal assistance mortgage loans or FHA loans that are insured by the U.S. Federal Housing Administration. These loans are growing in popularity as they enable credit-challenged borrowers to receive loans with lighter credit thresholds and lower down payments than traditional mortgages.

Prior to closing on an FHA loan, relocating borrowers must fully execute the guaranteed buyout agreement to ensure the previous home debt is excluded from qualifying ratios. If you are in this situation, check with your lender, as you may be able to close without the fully executed agreement if a formal letter signed by all parties indicates the guaranteed buyout agreement will be fully executed by a certain date.

As of November 19, 2007, federal regulatory agencies revised the debt-to-income qualification requirements for interest-only loans and ARMs. The changes are as follows:

• For interest-only loans, qualification is now determined using a fully amortizing payment (PITI) over the term of the loan, not the interest-only payment. Borrowers' debt-to-income ratios must be capable of covering the full monthly payment, not the smaller interest-only amount.
• For ARMs, approval is now determined by qualifying the borrower at the greater of the note rate or fully indexed rate, rather than the start rate. This revision ensures borrowers are capable of covering the higher payments that result from the adjustable mortgage rate.

Borrowers should keep in mind that duplicate housing payments will not offset a high debt-to-income ratio, unless they are guaranteed for at least three years.

With the increased complexity in mortgage guidelines, borrowers may experience longer underwriting times. Borrowers are advised to address their financing needs as early in the relocation process as possible.