The question:

“I hear a bunch of news stories about how there is a credit freeze and mortgages are harder to get these days. So, is it true that mortgage borrowers are getting denied more often now?”

My Answer:

In a word…”Maybe”.

With the mortgage meltdown in full swing, it might seems logical to believe even good borrowers and good loans are being denied.

It’s not true.

However, due to dropping home values especially in “high risk” areas like California and Florida, lenders are looking to limit exposure in these areas.

Reasons Loans Are Getting More Denials

I was discussing this in an industry forum where one Florida broker mentioned he only closed 1 loan out of 10 last month and the reasons for the denials were more property related rather than borrower related.

This reminds me of the late 1970′s and early 1980′s when mortgage rates topped out at 19%. Institutional mortgage lending ground to a halt. If a home owner wanted to sell, he couldn’t find a buyer who at 19% could get qualified for a mortgage.

But the market found a way.

Seller financing grew exponentially during that time where the seller became the “bank” just to move his home. Even though this not possible due to current mortgage terms prohibiting it, hopefully another way will materialize to break loose this mortgage liquidity “log jam”.

Frozen Credit Market Fallacy

This brings up the fallacy that due to the “frozen credit market” mortgages are some how more difficult to get.

The opposite is true actually.

The credit freeze you hear about on the news is a freeze in bank-to-bank lending which has nothing to do with consumer or mortgage lending.

Let’s not confuse a return to a more common sense approach to underwriting standards with a frozen credit market.

Make no mistake, if you qualify for a mortgage, the banks will lend to you. The only caveat is if your home is in a high risk area, the bank could temper their enthusiasm based on the property location and local home valuations ….not you or your credit qualifications.

FHA to The Rescue

If you do present a credit challenge, consider applying for an FHA home loan. FHA underwriting is currently the most forgiving. This is a government run mortgage program unlike Fannie Mae and Freddie Mac, so they have a different set of approval guidelines.

Thanks for the question.

Good Luck!

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