Lending Issues in the Real Estate Market

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

Since the 2007-2008 housing market collapse, two of the defining issues in real estate lending have been tightening up of lending standards and decreasing interest rates for mortgage loans. In this lesson, we will discuss these issues and how they affect the current housing market.

Lending Issues in Today's Market

Ben wants to buy a house but has heard that the housing market has changed since the recession. Following the housing market collapse of 2007-2008, borrowers have benefited from lower interest rates, but have also had to meet higher standards to qualify for mortgage loans. Let's take a look at these issues in depth and discuss how they might affect Ben.

Predatory Loans

Flashback to 2005. Ben considers buying a home. He recently started his own landscaping business but doesn't have much in the way of an income history before this. There are plenty of subprime lenders who are willing to offer a mortgage loan to him at this time - even with minimal to no verified information regarding his income or assets. A subprime loan is a mortgage loan granted to a high risk buyer, or one more likely to default on a loan. Subprime mortgages often feature significantly higher interest rates, fees, balloon payments or changing terms. Many people now consider subprime loans to be predatory loans, or loans which were marketed and offered to people who were not financially stable and likely to lose their homes to foreclosure.

Ben was lucky enough to avoid buying a house in 2005, so he was relatively unaffected by the housing market crash of 2007-2008. During that time he rented a house and built up his landscaping business to a moderate degree of success.

More Restrictive Lending Standards

Lenders, under market and political pressure, make fewer subprime loans these days. If Ben approaches a lender about a mortgage in the current housing market, what information will he need to provide?

Lenders will verify all of Ben's assets, income and liabilities. He will need to provide bank and retirement account statements as well as tax returns. For example, a gift from his parents to help with the down payment must be verified as an actual gift and not a loan that has to be repaid. This degree of vetting helps limit loan financing to those who are truly financially prepared for home ownership.

In order to qualify for a home loan, Ben will not only have to prove he has a stable income but also a small enough debt load that a house won't be an overwhelming financial burden. This will be calculated as his debt to income ratio. The lender will likely require that the mortgage payment plus all other debts (such as student loans or car payments) don't exceed a certain amount.

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