Back to basics

When Dale and Sarah Moses set out to buy their first home more than a year ago, they found their credit score lacking, and they had trouble coming up with all the money they needed on Dale Moses’ salary as a high school custodian.

They decided to wait, save and build up their credit by keeping bills current for a year. The couple later qualified for a low-interest, state-funded loan of $80,000. And with secondary money from a local nonprofit and a grant from a Spokane bank, they closed on their $99,000, two-bedroom house late last month, putting only a couple thousand dollars down.

“We kind of stacked them all on top of each other,” Sarah Moses said of the programs.

But that kind of assistance is no longer available to first-time buyers, even as the mortgage industry tightens its credit-score standards and requires bigger down payments. Area buyers, especially ones looking for their first homes, are feeling the squeeze of the national credit crunch, Realtors and lenders say.

“So for the new first-time homebuyers, they’re going to have to start learning to save,” said Diana Featherkile, a home-loan consultant with AmericanWest Bank. “We’ve been spoiled (by) getting in with no money, and we’ve got to get back to basics in investing in ourselves again.”

Lenders say no-down-payment loans popular during the housing boom have mostly evaporated, causing borrowers to turn to Federal Housing Administration-backed mortgages. Would-be buyers can expect to put 3 percent to 5 percent down and have credit scores above 620.

“A few years ago, credit was too easily obtainable, and (that) put some people into homes that they lost because they weren’t financially ready to go,” said David Crosby, owner of American Dream Homes in Spokane.

“We’re back to old-school lending, where buyers actually qualify for their mortgage, which is a good thing,” said Lisa DeBrock, manager of the Washington state Housing Finance Commission’s Homeownership Division.

Featherkile, who specializes in working with first-time buyers, said lenders have gone “back to basics where we were 5 years, 10 years ago, really documenting everything, crossing all the Ts” to show people qualify.

“Investors buying the loans now don’t want any more foreclosures,” she said.

The volatile credit market has prevented the housing commission from pricing bonds used to provide below-market-rate loans and down payment assistance for first-time buyers, putting the brakes on those state programs. About 50 people are on a waiting list, with at least 10 from Spokane, DeBrock said.

“For all monies, there’s a wait list; it’s unprecedented for us,” she said. “There is no one, unfortunately right now, who will purchase our bonds,” which typically were bought by government-chartered corporation Freddie Mac.

The credit restrictions are driven by national mortgage insurance companies, which have restricted requirements for loans they will back in response to the subprime meltdown. Because of those changes, Featherkile said, “It’s really, really crucial that people understand where their credit is right now.”

“If you have lower credit scores, it is going to be harder for you to get financed,” said Matt Riener, manager of an Eagle Home Mortgage branch in Spokane.

Reiner recommended undergoing free prequalification with a lender, saying buyers may need to improve their credit and delay buying by six months or a year to accomplish those tasks. It’s possible for almost anyone to buy, given enough work, he said.

“We’ve had to turn more people away, as far as financing goes,” Reiner said. “But that’s just a temporary thing.”

While Realtor Crosby said he fields maybe 40 calls a week, only one or two might have the ability to purchase a home. Many have bad credit records from unpaid bills.

Crosby calculated a couple would need to make at least $15.96 an hour to buy a $100,000 home, assuming 6.25 percent interest on an FHA loan and other costs, without spending more than 29 percent of their income on housing. As of early last week, however, the Spokane MLS listed only about 40 homes for $100,000 or less, mostly in North Spokane, he said.

“A car payment or two and a couple credit cards, and they can’t afford that house until their income goes up,” Crosby said, adding he doesn’t know “many young people that walk in my door relatively debt-free.”

To cope with credit changes, borrowers might ask sellers to contribute closing costs or seek down payment assistance programs, like those offered by Spokane Neighborhood Action Programs. That program, however, like the state’s House Key loan program, carries restrictions.

To qualify for House Key, borrowers must be first-time buyers or buy in specific geographic areas, meet income and purchase-price limits, and attend free education classes. Similar programs exist in Idaho.

“For me, it’s increasing the attendance in my first-time homebuyer classes,” said Julia Hansen, a consultant with Countrywide Home Loans. “More people are coming to class because they need more help. They can’t do it out on their own.”

Lenders say they will work with people planning on state loans find other products. Many people also can qualify for conventional financing, but don’t realize it, said Ed Bartlett, owner of Spokane Home Buyers.

“There’s just a lot of misconceptions because of all the gloom and doom that’s out there on the evening news, so people don’t even try,” Bartlett said. “In most cases, they underestimate what they can do.”

Hansen said homeowners looking to move up also may have a hard time. Some areas may not have increased in value, and with an abundance of homes on the market, Hansen said she gets calls daily with people questioning lowering prices on homes they’re trying to sell. People buying their second or third homes should watch their ratio of debt to income and make sure payments are made on time, she said.

New costs implemented by Fannie Mae and Freddie Mac, two government-chartered corporations that buy mortgages for sale to private investors, will “more closely affect people with low credit scores and people who are not necessarily purchasing but taking money out” through refinancing, said Tom Bogley, a home loans manager for Numerica Credit Union in Spokane.

On March 1, Fannie Mae and Freddie Mac rolled out an “adverse market” loan fee of one-quarter point on all loans.

“That’s just the tip of the iceberg,” Bogley said. “Unless Congress steps in and does something … it’s not going to be pretty.”

Kootenai County also has been designated by most mortgage insurance companies as a “declining markets area,” Bogley said. That means more restrictions, such as cutting the allowable loan amount by 5 percent.

“Hopefully that’s going to be removed in the near future,” he said.