A couple of months ago I wrote about the decision and process I went through in buying a home in Houston, TX. As a continuation to that blog, I wanted to talk about tight credit standards: one of the things that, according to Ken Simonson, Chief Economist for the AGC, is limiting single-family growth.
In the latest Dodge Outlook report, they mention "lending standards are still tight... [and] the 20% down payment requirement is still restraining first-time homebuyers demand..." How will first time homebuyers fuel the the Single-Family market if they can’t get financing?
Obviously, we don’t want a repeat to the 2008 crash, and certain controls are needed, but we need to find a happy balance to continue with growth.
Back to my own story, I truly never anticipated how detailed and complicated the mortgage process would be.
- First of all, my husband and I have both been financially stable with limited numbers of loans and with the ability to save money every month. We have high credit scores and have never faced any financial issues.
- Secondly, the budget we set out for the house was set at a very conservative level: something we could afford with only one of our incomes.
Given these two main factors, I felt the financing part would not be an issue. And in fact, when we were shopping for mortgages, it all seemed very straightforward. We had offers from three companies: one bank where we had most of our accounts, one bank my husband already had a mortgage with (for his house in Atlanta) and a mortgage company recommended by my husband’s company.
After a few days considering our options, we decided to go with the bank where we had our accounts. I remember our real estate agent being hesitant about our choice, but we had confidence in our contact and thought it would require less paperwork since our accounts were all housed there.
There were two or three phases of the bank asking for documents from us and we provided the documents and everything was running smoothly... until three days before closing. That’s when things got crazy.
It seemed like it was the first time someone was actually reviewing all the paperwork and then more and more asks kept coming. They needed justifications for everything and anything. My husband and I promptly provided the documentation, but the process got delayed. Every single day after our initial closing date, they came up with something new and always promised that the closing would happen the next day, but then something else would come up.
One example was the appraisal... for some reason they needed another appraisal because something had not been specified by the first appraiser. So in the rush, they got another person from the same company (hired by the bank) to go out and check on this one item from the appraisal. He checked it, resigned the document and sent it to the bank. All seemed well. But then of course something was not.
Since the new appraisal was done by a different person, they needed to get another evaluation. And so on and so on. It was insane. We then got a call from the bank lawyer, who had some questions about the transaction. Following this call, we receive a call from the head of the mortgage group in Texas, trying to explain how we had gotten caught up with some new law that required us to wait another 48 hours before being able to close. I can’t remember the law or why we were caught up in this, but it was just an extra regulation that had been put in place due to the crisis.
We finally closed one week after our initial close date, and all worked out. But here are some lessons I took from this process:
- Because of the 2008 mortgage crash, mortgage companies, especially banks, are under much more scrutiny then before. I got the impression that many times the employees don’t even understand all the regulations and rules, so they have added layers and layers of verification to make sure nothing is missed. For the client, this results in delays and frustration.
- If it is complicated to get a mortgage for folks that have the down payment and are in a good financial position, I can only imagine what “borderline” folks go through. This helps explain the lull in first-time homebuyers. People are trying to make sure they have their finances in place before even considering buying.
Going back to what we are hearing from economists, Single-Family will only really take off when some finance standards are eased. There needs to be a better way to determine who are good candidates for mortgages without excluding them from being homeowners.
Recently, I read an article where they mentioned that “economists are expecting there will be some easing in lending standards.” However, once they looked at the data, what has actually happened is that the median FICO score for loans is four point higher this year than last year. If we, the construction industry, want to continue positive growth in the single-family sector, the current barrier to entry with financing is something that is going to be a hindrance and have to potentially be overcome.
As an industry, how will we get around this? If you have ideas or want to share your own story, leave a comment below. For more trends impacting construction download our construction forecast report.