How High-Income Individuals Can Prepare For Mortgage Lending’s Next Hurdles

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Four times annually, the Federal Reserve surveys 84 banks around the country regarding their general lending standards.

One of the survey questions asks about current mortgage lending standards and whether it's getting harder, or easier, to get approved for a home loan.

In the most recent survey, 75 percent of the banks said they're making it harder for "prime" borrowers to get a home loan. 

That means you, Mr. Lawyer. And, Dr. Doctor.

A six-figure income with A-plus credit won't get you carte blanche with the bank anymore.  Lenders stopped fighting over the right to collect your interest payments months ago. 

Today, they're more worried about you defaulting.

The first wave of lender tightening eased into the books earlier this year.  Most changes were focused on the borrower's individual credit characteristics including income, assets, and credit score.

The second wave of tightened, however, has been completely out of the mortgage applicant's hands.  It's collateral -- the fancy bank term for "what your home is worth".  Banks are very concerned about collateral.

Mortgage lenders read the papers, too, and they know that home values are falling or are flat in most neighborhoods.  There's a recovery underway, but it's not going to be immediate. 

Therefore, many banks assume that the 80 percent home loan made today will be a 85 percent home loan sometime in 2009 and having less than 20% equity in a home is not where the banks want you to be -- especially with joblessness on the rise and a loads of unanswered questions about the economy.

For homeowners with jumbo or super-jumbo mortgages, this loan-to-value change will resonate deeply.  Just this morning, for example, one of the country's largest niche lenders dramatically lowered its maximum LTV ratios for prime borrowers. 

Look at how it changes the borrowing landscape for a condo buyer in Chicago with strong income and excellent credit:

• Yesterday: 25% downpayment required, second mortgage permissable for 5%
• Today : 40% downpayment required, no second mortgage permissable

In other markets, where home values are more dubious, like California, downpayment requirements are even higher.

Now, this isn't to say that prime borrowers won't get approved for home loans -- it's just meant to tell the street-level story of what's going on.  There are a lot of people in cities like Chicago or Cincinnati that were first-time home buyers between 2002-2006.  For those homeowners, the only mortgage approval system of which they know is one that's based on them -- the traditional mortgage approval triangle.

Today, it's The Triangle + The Collateral. 

This is why prime borrowers are finding it harder to get a mortgage -- it doesn't matter what you look like on paper, it's what you and your home look like on paper. 

The market will likely to tighten further in the near-term so the best way to prepare for is to ask good questions in advance of your actual needs.  A proactive plan always works better than a reactive one. 

If buying a home or refinancing one is in your plans for December 2008, or January-March 2009, reach out to your loan officer to find out how changing guidelines for prime borrowers can impact you.

Especially if you're a jumbo or super-jumbo borrower.