Lenders Getting Creative Less Restrictive Standards Enable More People To Qualify For Home Loans

Unexpected bills left Gary and his wife Trudy underneath a pile of debt in October 1993.

With no other options, the Spokane couple filed for bankruptcy.

They emerged from bankruptcy in January 1994, and, a little more than two years later, closed the deal on a new home in North Spokane.

Virtually unheard of two years ago, a transaction like this is possible because of increasingly flexible and lenient mortgage plans - through both the government and private lenders.

The plans have allowed more people - even those with bad credit - to realize the dream of owning a home.

While Gary and Trudy, who asked that their last name not be used, represent an extreme example, many potential home buyers struggle to meet the most basic mortgage requirements.

“We’re seeing that there are loans out there that should be made that don’t meet black-and-white guidelines,” said Gail Fox, sales manager at Norwest Mortgage Inc.

Being more flexible, especially with credit, is more realistic than expecting the same loans to fit every applicant, said Kip Clark, president of Family Home Mortgage.

“It used to be if you had any delinquencies in the last 12 months, you couldn’t get a loan. Well, that’s not life. That’s not reality,” Clark said. “You have to go back and look at the history of the situation. You don’t disqualify someone when their previous history has been excellent.”

The lenders’ motives are not entirely altruistic. The Spokane housing market has cooled off since the hot selling days of the early 1990s. Heavy competition for a limited number of potential customers forces lenders to work harder for their commissions.

“Three years ago, we were on fire,” said Marty Greenham, a loan officer at Mellon Mortgage. “Lenders were so busy, they could pick and choose the cream of the crop.”

Now, lenders need to be more creative, he said.

Marcy Bennett, a loan officer at Farmers and Merchants Bank, predicts buyers will see even more flexible financing plans as interest rates rise.

“These creative programs are going to come out of the woodwork,” Bennett said. “We get creative and flexible when business slows down.”

And, said Greenham, despite lower down payments, many people still can’t afford to come up with enough cash up front. “A lot of people have excellent credit and good incomes, but just don’t have any savings,” he said.

Still, lenders point to a variety of factors as proof that mortgages have become more lenient. Down payments are lower. Child-care costs are no longer figured into monthly expenses when computing what a person can afford to pay for housing. And banks sometimes will pay closing costs on a loan if they add up to more than a buyer can manage.

In exchange for paying the closing costs, banks add at least a quarter percentage point to the interest rate.

Flexible mortgage programs are particularly beneficial to first-time home buyers. Those buyers make up an increasing percentage of the market, according to statisitics from Fannie Mae, one of the nation’s two largest purchasers of mortgages.

In 1993, 6 percent of all Fannie Mae’s loans in the city of Spokane were to first-time home buyers. That number jumped to 9.5 percent in 1994 and 15 percent in 1995, said Anthony Tansimore, Fannie Mae regional communications manager.

Though lenders typically become more lenient in a buyers’ market, the programs currently available also represent a broader trend toward marketing in the industry, said Loretta Cael, president of the Spokane Mortgage Lenders Association.

“Lenders need to find ways to get people into houses,” she said. “We can’t just depend on interest rates. We’ve got to do something else.”

Sometimes that means working closely with potential home buyers to clear credit records. Such was the case with Kelly and Deryck Johnson, who recently closed the deal on their new home in Cheney.

The Johnsons had several payment delinquencies to clear from their record before they’d be approved for a loan.

At Washington Mutual Bank, the largest home lender in Spokane County, the Johnsons met Cael, who helped clear their credit record. The Johnsons were approved for a loan for a three-bedroom, two-bathroom house on 10 acres in Cheney. The couple needed extra acreage for the quarterhorses they raise.

“A couple of years ago, (Washington Mutual) wouldn’t even have tried,” Cael said of the Johnson’s loan. “We would have looked at the credit report and said, ‘Come see us in a couple of years.”’

The best candidates for more flexible mortgage plans are first-time buyers who can’t afford a huge down payment, but can handle the monthly payments. Those who have money saved for the down payment, but can’t handle a high monthly expense, also can benefit.

When closing costs were removed from the equation for Joe and Debbie Gibson, it helped the couple buy a three-bedroom home in the Spokane Valley. It’s right across from a park, where the couple’s three children can play.

After years of renting, and putting money into “somebody else’s pocket,” Debbie Gibson said, the couple went to talk to a loan officer, not knowing whether they’d qualify.

The loan was better than the Gibsons expected. Designed for first-time buyers, it was similar to Federal Housing Administration loans, which are popular among first-time buyers. It required only a 3 percent down payment, as opposed to the more traditional 10 percent.

The clincher for the Gibsons, however, was the bank’s offer to absorb closing costs in exchange for a quarter-point higher interest rate.

“That made it a lot easier for us to get in there,” Debbie Gibson said.

The Gibsons saved between $2,000 and $2,500 up front. For about $3,600, they were able to get into an $81,000 home.

Rising interest rates and the Spokane housing market’s return to a normal sales rate may force lenders to be more creative in the short term. But Cael says broader trends - such as an increasingly mobile society - could have a greater long-term effect on the mortgage industry.

For example, people are staying in homes for shorter periods of time. Before 1993, Cael said, buyers would stay in a home for between five and seven years. Now it’s closer to three to five years.

“We’re even going to find that the 30-year fixed rate mortgage is a thing of the past,” Cael said. People are asking, “why do I need a 30-year mortgage when I’m only going to be in the house for five years?”

Cael expects to see more 20- and 25-year mortgages replacing 30-year loans. Also, she said, people frequently switch to 15-year loans when they refinance.

Mobility also has affected job requirements on loan applications, Cael said. Lenders used to require that an applicant have the same job for two years. Now lenders are looking merely for similar work experience for two years, she said.

“Somebody who was an auto mechanic and now is a physical therapist - we’re going to question that,” Cael said.

The housing industry in Spokane - including lenders, builders and Realtors - has formed a committee to market its products better and educate the public about available programs.

“So many people don’t know they can get into a home,” Cael said. “If we don’t tell them, nobody will. You could own a $70,000 home for $600 a month.”

Three times per month, Kip Clark, of Family Home Mortgage, offers free mortgage financing seminars. Family Home Mortgage also puts first-time buyers through a four-hour video class so they’ll understand the process.

“A lot of times, houses go into foreclosure because of ignorance,” Clark said. For example, people will lose their jobs and not know what their options are in terms of making payments. “By better educating the borrower,” he said, “it’s helping us in the overall delinquencies.”

, DataTimes ILLUSTRATION: Color photo Graphic: First-timers