Mortgage Rates are Low, but Loans are Difficult to Get

By Pete Carey

Mercury News
Posted: 01/06/2009 06:07:52 PM PST

Valley saw surge in foreclosure filings in 2008 Mortgage rates are at their lowest level in decades, but thousands of Silicon Valley residents are discovering that qualifying for a loan is tougher than it has been in years.

Banks are reluctant to lend at favorable rates to all but the most bulletproof of borrowers, according to area mortgage brokers. Unless you have a gold-plated credit score, low credit-card debt and a big down payment or a lot of equity, those rates of 5 percent or less on a 30-year fixed-rate mortgage may be out of reach.

Adding to the difficulty for many people hoping to refinance loans taken out in the past few years is that the collapse in home values has eroded their equity so much that they don't qualify for a new loan.

"It's like cable TV — there's 200 options and nothing worth watching," said Andy DelGesso, a hospital department manager who failed to qualify to refinance his loan on his San Ramon home because his equity had declined to less than 20 percent of its value.

"We were all spoiled the last few years when it was so easy to qualify," said Patrick Dudum, area sales manager for Equitas Capital in Los Gatos. "Relative to 2004 it is difficult, but if you have followed the market for any length of time, this is a normal market."

A couple of years ago, you wouldn't have needed much of a down payment. These days, to get the absolute lowest rate, it's likely you will need a big down payment and a credit score of 720 or above, and be able to document your income. Banks don't want to see much credit-card debt, either. They say much depends on individual circumstances, with no two borrowers exactly alike.

In any case, government actions to revive the housing market appear to be bearing fruit, even as the lending industry has returned to the tighter standards that prevailed before the housing bubble.

There are still loans for those who don't meet those requirements, but they cost more and carry higher interest rates. "The credit is available, it's just not as favorable," said Keith Gumbinger of HSH Associates, a New Jersey firm that tracks loan rates. A person with a 620 credit score putting less than 20 percent down "could be looking at 6.5 percent or more," he said. (Credit is rated on a scale of about 300 to 850 in a system known as FICO.)

"It's more back to the basics,'' said Cathy Warshawsky, president of the Silicon Valley chapter of the California Association of Mortgage Brokers. Warshawsky said people who have less than 20 percent equity or who are trying to take cash out in a refinance are being told they need to buy mortgage insurance. Also, loans above $417,000 but below $625,500 — Fannie Mae's limit on so-called "jumbo" loans that meet its standards — still cost half to three-quarters of a percent more in interest.

"Standards across the country absolutely have tightened," said Arlene Allert, a Wells Fargo Home Mortgage retail regional sales manager responsible for the Bay Area. She said Wells already had tight standards, so it hasn't had to change them as much as others have. But the biggest hang-up for refinancing is the decline in home values, Warshawsky said.

Jerry McClain of S&L Home Loans in San Jose, who is hospital department manager DelGesso's broker, said he's seeing lots of people who have perfect payment histories, good credit scores, stable income and low credit-card debt being turned down because their equity isn't enough to satisfy lenders.

"In the Bay Area, we not only have microclimates, we have micro-neighborhoods," McClain said. Some areas have lost value dramatically, while others are at least holding their own. If you aren't in one of those areas, unless you have a great deal of equity, you're having a rough time getting a loan.

The banks are demanding tougher appraisals, too. "Everything has to be explained in greater detail," said appraiser Greg Walker of San Jose. "Every appraisal I do, we look at what's happened in that neighborhood over the past year, and everything's declined over the past year with the exception of a few neighborhoods."

Among the stable areas, Walker said, are Los Gatos, Cupertino (within the Cupertino school district), Sunnyvale and the Almaden area of San Jose. East San Jose is down 38 percent to 50 percent, depending on the neighborhood, he said.

But if you qualify for a loan, the rates are truly great, the best in a generation.
So, despite the stricter standards, first-time buyers are beginning to snap up homes — still mainly foreclosures and short sales — tempted by the unique combination of lower prices and low interest rates. They're the people who sat on the sideline during the boom, saving money for a first home.

"I've been stoked about this market for the last three months," said Dudum of Equitas. "The government is going to throw everything in their power at this problem to fix it. We're going reap the benefits. We're going see a boom in the next 24 months, and the last one will pale in comparison."