It's my understanding that a mortgage company can deny a loan right up until the closing as long as the reasoning is justified, but that doesn't happen too often. And, in fact, you can decline to sign the mortgage papers yourself (although you will sacrifice your earnest money).
You are putting 20% down. That should make everyone happy even with a 620 score. The people who are going to have problems with getting homes are the same ones who had problems getting homes back in the 60s and 70s and 80s: value of the home is more than 2.5 times salary; can't verify salary; debt to credit ratio is too high; and low downpayment (along with credit issues). BUT YOUR BIG PROBLEM IS THAT YOU MAY BE IN A CONTRACT FOR A HOME THAT IS NO LONGER WORTH THE MORTGAGE (see below). Yes, you could have signed a contract to pay for a $250,000 home being built now that is really only going to be worth $200,000 (or less). Before you sign the papers, make sure you get a second appraisal.
As to the earlier question about the fallout from the subprime mortgages, I think we are now seeing (just a few months later) that there is serious fallout. Wells Fargo Bank announced today that it is closing down its subprime operations. Countrywide is having problems with increased defaults from prime mortgages. And the problems with these foreclosures isn't just the "traditional" reasons for defaults (divorce, ill health, loss of job). The primary reason these homes are foreclosing is that the debtors can't pay the increased ARMs, and they can't refinance the ARMs because the value of these homes is decreasing -- so, the appraisal value doesn't match the amount of the mortgage. Think about it like this: you bought a home in 2002 with an ARM but you told yourself you could refinance before you had to pay the increased rate, you've been making your regular payments, the ARM is now set to increase, but when you go to refinance you can't get approved before the appraisal value is less than you owe. That's because all the payments you've been making for 5 years has gone to interest and not principal. That's why prime mortgages are starting to default. People were buying homes in the $250,000-$500,00 range based on low ARMs and now their homes are worth $175,000-$425,000.
I'm looking to buy a home in late 2007 or early 2008. So for the past year I've been cleaning up my credit and looking at home prices. Here in Dallas -- just looking over the internet at remax.com or century21.com -- I've found that the price of homes in the last couple of months has fallen considerably. A home that was being offered for $175,000 in February is now being offered for $135,000, with seller paying closing costs. That's because the seller is trying to sell the home before the bottom really falls out of the market. And I see listing after listing after listing saying "home sold as is" or "short sale" which are other ways of saying "foreclosure" or "soon-to-be foreclosure." Entire zip codes are dotted with foreclosures. And Dallas is a "booming" market compared to Michigan.
Why is this being kept so quiet and, until very recently, out of the media? If you are a homeowner (as a lot of voters are), you don't want foreclosure signs or vacant houses on your street. Mortgage companies/banks sell foreclosures at reduced prices because they want to recoup their losses as soon as possible. An important aspect of appraisals for existing homes is the price recently paid for comparable homes in the neighborhood. The foreclosure drags down the value of all property in the neighborhood. Most people don't care until they try to sell or refinance their home; that's when they learn how much trouble they are in. As more and more people realize what's going on (because the economy as a whole will start to shrink and more and more people will get laid off), then these homeowners will become desparate and start screaming to their Congressmen to do something to save their homes.
On the bright side, anyone who is in the market for a home within 6-8 months will be able to buy a bigger, better home than they would otherwise have been able to afford because appraisals and prices will plummet. That's why I'm confident that in 6-8 months I'll be able to buy a $175,000 home in Dallas for $135,000-$140,000. If you are credit challenged right now (or you just are in the market for a home and don't currently own a home that you are going to sell), wait it out, clean up your credit, save for a 10% downpayment, and then buy a home later. If you are going to buy a home after selling your home, you'd better start selling now.
