Why Comparing Mortgage Lenders Matters in a "Distressed" Market

When Fannie Mae and Freddie Mac began charging more for mortgages in certain parts of the country--making it harder to qualify for home loans in "distressed" or "declining" real estate markets--it was big news.

The two mortgage giants eventually abandoned their practice, but guess what? Your mortgage pricing and availability still depends on where you live. How does that work?

More importantly, how can you minimize fees and requirements that lenders add just because of your property's neighborhood?

Market-based mortgage requirements

First, a brief background. In 2008, Fannie Mae said all home loans delivered on properties in "declining" areas would require a down payment of 5 more percentage points than mortgages on properties in more stable areas. That is, if a loan program allowed for a 5 percent down payments in stable zip codes, it would impose a requirement of 10 percent down in declining areas.

Fannie and Freddie "strongly encouraged" their approved mortgage lenders to formulate their parallel policies.

Critics swooped in immediately, charging that imposing higher down payments for applicants in certain areas unfairly penalized homeowners and buyers in those areas. They further said that labelling regions as "declining" would make it harder to sell properties in those areas, creating still more foreclosures and resulting in a downward spiral that could destroy whole communities--including stable neighborhoods that fell within the affected zip codes or counties.

Moreover, many markets defined by Fannie and Freddie as "declining" are heavily populated by minority homeowners. Critics said that the different home loan requirements came very close to "redlining," the illegal practice of treating minority-dominated neighborhoods differently by refusing to lend there or creating more onerous requirements for borrowers in those areas.

Fannie Mae backed off, but many lender practices remain

In June 2008, Fannie Mae formally withdrew its declining market policy and reverted to its old method of requiring the same down payment for all areas.

However, Fannie did impose an "adverse market delivery charge," which adds 0.25 percent in fees to every mortgage it buys. It also dropped the maximum loan-to-value it would accept from all borrowers.

Despite Fannie's withdrawal, however, many mortgage lenders still continue to differentiate between desirable markets and distressed ones--and this means that you'll likely pay more for a mortgage in declining areas or have to come up with a higher down payment when you buy a home in those areas.

Bank of America, for example, charges an additional 0.25 percent in fees to those who buy or homes or refinance mortgages in declining areas. So do Wells Fargo and other lenders.

Mortgage insurers also differentiate geographically

If you have less than a 20 percent down payment when you get a new home loan, you need mortgage insurance. But mortgage insurers still choose not to write policies in some areas, or they may eliminate some kinds of dwelling coverage or require higher credit scores to insure your mortgage.

In a July 2010 press release, mortgage insurer MGIC mentioned the creation in late 2007 of "two tiers of 'restricted markets'" and continued, "Our underwriting criteria for restricted markets do not allow insurance to be written on certain loans that could be insured if the property were located in an unrestricted market."

This means that, in all likelihood, if you want to buy a condo in Florida, you'd better have at least 20 percent down.

Mortgage markets looking up, slowly

However, there are indications that mortgage insurers are loosening up these requirements. MGIC reports moving some housing markets off its restricted markets list and other markets from a "Tier Two" list to a "Tier One" restricted list.

But this is a slow-moving process as the economy continues to struggle. What can you do if you're refinancing or buying a new home in a distressed area? The answer is to approach different mortgage lenders for quotes.

Refinance mortgage lenders and purchase lenders have different criteria

Geography-based price differences in mortgages are a big reason why you should shop with several mortgage lenders, both national and regional, before deciding on a home loan. Why? One lender may consider your area "declining," but another may not--leading to potentially huge differences in your down payment or fees.

Requesting multiple mortgage quotes online is a fast and easy way to educate yourself and get a better deal on your mortgage.