All the hand-wringing aside, underwriting guidelines for prime mortgages haven't changed much since the housing bust. But what has changed are lenders and their automated underwriting tools.
In 2006, the minimum credit score for loans sold by primary lenders on the secondary market to Fannie Mae was 620 -- exactly where that requirement stands today. Likewise, the maximum debt-to-income ratio (DTI) is the same now as it was during the boom years, 38 percent, with exceptions up to 45 percent with compensating factors.
Still, it's much more difficult to qualify for the best rates and terms. And the reason for that, according to Credit Sesame, a website that helps borrowers make smart credit decisions, is that lenders are no longer pushing loans through at the limits.
"While the underlying requirements loaded into automated underwriting (AU) engines are not publicly disclosed, it is clear they were much more aggressive during the boom years," says Tony Wahl, director of operations at Credit Sesame.
"In the boom years, for example, it wasn't uncommon for Fannie Mae's AU engine to approve borrowers with a good credit score and a reasonable loan-to-value ratio (LTV) of up to 65 percent debt-to-income. Today, it tops out at 45 percent, even for the most qualified borrowers."
Another contributing factor: Lenders today run a far greater risk of being stuck with a loan they cannot peddle on the secondary market. Consequently, they are adhering much more closely to the rules.
Back then, an AU approval almost guaranteed your loan would be gobbled up by an investor without much risk of it being audited or repurchased. Today, mortgages are scrutinized up and down, even post-closing, and lenders are being required to buy back those loans for relatively minor reasons.
So, to offset that risk, lenders add on various "overlays" over and above the AU engines' rules. Those overlays vary from lender to lender, but Wahl says it is not uncommon for lenders to require minimum credit scores of 640 or even 660, and maximum DTI ratios of no more than 42 percent.
Many of the other underwriting rules haven't changed significantly, either. But again, the regulations inside the AU engine black boxes are tighter, and the willingness of lenders to accept waivers is lower. And that makes obtaining financing more challenging than it has ever been.
According to Credit Sesame, which allows people to shop for mortgages based on pricing, underwriting rules and lender-specific requirements, here is what you can expect today versus what was acceptable in 2006:
-- Bonus/commission income: Seven years ago, AU engines would ordinarily approve borrowers with reduced income documentation, such as a one-year history of commissions and bonuses. Today, two years are required.
-- Investment property: The maximum loan-to-value ratio on investment property has slipped from 85 percent to 80 percent. The change isn't terribly significant. But on top of that, mortgage insurance is no longer available on rental houses, so borrowers are limited to making down payments of at least 20 percent.
-- Cash-out refinance: Similarly, the max LTV ratio for cash-out refis has dipped from 85 percent to 80 percent. And mortgage insurance is no longer available for loans in which the down payment is less than 20 percent.
-- Reserves: In 2006, borrowers were required to have anywhere from zero to six months' worth of PITI (principal, interest, tax and insurance) in cash in reserve. Now, it can be up to 12 months' worth.
-- Gift funds: Gifts from family members or friends were allowed in 2006, even if the LTV was over 80 percent. And the same is true today, except that lenders are much more diligent in making borrowers prove the source of the gift money and that it really was a gift, not a loan.
-- Pay stubs: It used to be that pay stubs were required within 30 days of applying for the loan. Now it is within 30 days of closing.
-- IRS Form 4506T: In 2006, this form, which gives the lender permission to pull your tax returns directly from the Internal Revenue Service, was usually signed at closing but rarely executed. Now, most lenders want the form signed at application, and they use it to confirm your income as stated.
-- W2s: Often, the need to provide W2s as proof of income was waived in '06 if you signed a 4506T. Now, you need to provide two years' worth of this basic income verification tool, as well as a signed 4506T.
-- Employment: Verbal verification of employment used to be necessary within 30 days of closing. Now, such proof is required just before settlement.
"Today, most lenders are much more cautious in making sure no changes to a borrower's employment status have taken place since the initial application," says Wahl. "Most lenders will call employers immediately prior to closing."