Who Would You Lend Money To?

Today we are going to look at why down payment and credit don't really matter. To drive home the point, who would you rather lend money to?

A) First time home buyer, getting a gift for the down payment (because she has no savings), who has a 650 credit score with a debt ratio of 45% based off of the income she receives from the job she has been on for 3 months since graduating from school... OR

B) Someone, who after being in the same line of work for 20 years, decided to started a business of her own, who has 50% to put down, an 800 credit score and cash reserves available to pay the loan off 5 times over...

I can promise you that if it is my personal money that is being lent out in this situation, I’m loaning my money to Ms. B! But guess what – if Ms. B tries to get a loan through the usual suspects (Fannie, Freddie, FHA, VA, etc...), she is getting declined while Ms. A is getting approved.

In the effort to continue easing credit restrictions on mortgages, everyone who matters (Fannie, mortgage insurance companies and even Congress) seem bent on re-establishing the 97% conventional loans. I’m not opposed to this and believe that when underwritten properly, good loans can be made to buyers who only have 3% to put down. But what I continue to be amazed at is the lack of effort to help those who have great credit and good down payment (20% or more), but lack the appropriate “documentable income”, qualify for financing.

I realize the pundits will say that it was all the stated income “no doc” loans that got us in trouble. But I’d argue that it was really a combination of giving those types of loans to borrowers with shaky credit and/or minimal down payment. When someone has great credit, there is a significant statistical improbability that he/she is going to walk from their loan. Combine that with a sizable down payment of 20% or more and the chances of default are almost negligible. When the downturn comes and real estate values decline a little, it’s the borrowers who only put 3% down that are going to be under water – not likely the ones that put 20% or more down.

I’m glad to see that there is an effort being made to soften credit standards. It is the natural pendulum swing from the extreme back to the norm. I’m just curious when our law makers will realize that the combination of great credit and good down payment count for something – even when the income doesn’t fit into the qualifying box.