Housing woes: a look at then, now

With all of the negative news surrounding the housing market, first-time home buyers Sunny Han and his wife, Tiffany, didn’t know exactly what to expect. But they were sick of paying rent and listening to their noisy upstairs neighbors, so they started the house hunt.

What they found was a market with almost too much choice and lots of room for negotiation. Plus interest rates that are still low. At least something hasn’t changed.

What has? Falling, not rising home prices. Several houses on the market for every buyer, not the other way around. Stricter mortgage standards that mean lenders are (gasp) verifying borrowers’ financial information. The difference between the March 2008 housing market and the March 2006 market is like night and day.

Here’s a before-the-boom-and-after look at the housing market.

Then: No down payment? No problem.

Now: Show me the money.

It’s like we stepped in a time machine and went back to the mortgage standards of a decade ago. Minnesota Mortgage Association President Tim Bendel said 100 percent financing has all but disappeared. He advises borrowers with good credit scores seeking a conventional loan to come to the table with a 5 percent down payment. Borrowers with credit scores below 700 may need a down payment in two figures. The more you can afford, the puffier your equity cushion — a benefit in a soft or declining market.

Then: Poor credit score? That’s OK.

Now: Weak credit score? Try a Federal Housing Administration loan, the original subprime loan.

Once subprime lending exploded, buyers with low credit scores could find someone to lend them money. Not anymore. House-hunters with a score below 700 will pay a higher interest rate. People with scores below 620 might not qualify. Bendel did find a lender that would originate a mortgage for a consumer with a 520 credit score, but it required a 30 percent down payment. “I don’t know how many people have that [much] money set aside,” he said.

Sunny and Tiffany, both 22, have no credit-card debt. But they also have nearly nonexistent credit scores, making it tough for the high-school sweethearts to qualify for a conventional loan. Todd Johnson, CEO of Edina (Minn.) Realty Mortgage, expects FHA loans to increase in popularity. Qualifying for those loans has less to do with a credit score and more with whether you’re paying your other bills on time. FHA loans, which require at least 3 percent down, also allow cosigners and gifts for down payments.

Another plus: Loan limits for FHA-backed loans have increased through the end of the year.

Then: Want it? Make an offer they can’t refuse.

Now: Take your time. Then offer 10 percent less.

During the boom, some buyers pounced on houses during the first showing, skipping home inspections and bidding up the price to get in. But now, “home buyers can definitely be patient,” says Edina Realty Realtor Kelly O’Neil. And with some good price data for the neighborhood, buyers can successfully offer less than the seller’s asking price.

O’Neil tells clients to assess their finances, seek pre-approval and “get your ducks in a row.” Even in a slower market, the pristine houses at a great price are on everyone’s radar and typically move in a couple of weeks. Then take that dream house to three different lenders and ask them to provide good-faith estimates in order to compare costs.

Then: Lots of debt, little income? That’s OK. We won’t check anyway.

Now: Nothing will get past us now.

Some companies were putting borrowers in home loans without verifying income sources and lending money to people with debt payments that ate up half of their before-tax pay. Today, borrowers should try to reduce what they owe so their debt-to-income ratio is no higher than 40 percent.

And don’t even think about fudging your financials. “You can’t tell us you’ve got $50,000 in the bank,” said Bendel. “We’re going to want to see it.”

XKara McGuire writes about personal finance. Write to her at kara@startribune.com or at the Star Tribune, 425 Portland Ave., Minneapolis, MN 55488.